Measuring Stock Market Risk Using Correlation and Linear Regression

Abstract

This report evaluates total and systematic risk for eight stocks-Microsoft, Exxon Mobil, Caterpillar, Johnson & Johnson, McDonald’s, Sandisk, Qualcomm, and Procter & Gamble-using the S&P 500 return as the market benchmark. Total risk is summarized by the mean, standard deviation, extrema, and a sample Sharpe ratio calculated with a zero risk-free rate. Systematic exposure is estimated from a simple market-model regression in which each stock return is regressed on the market return; beta measures market sensitivity, while R² shows the proportion of return variation explained by the market. In the supplied sample, Sandisk has the highest volatility and beta, Caterpillar has the highest Sharpe ratio, and McDonald’s has the largest R². The results indicate that volatility, risk-adjusted performance, and market sensitivity capture different dimensions of risk and should not be interpreted interchangeably. Because the sample period and data source are not documented in the draft dataset, the findings should be viewed as illustrative rather than as current investment recommendations.