Generalized securities investment risk includes systematic risk and non-systematic risk. Generally speaking, systemic risk is related to the volatility of the market, and non-systematic risk is the risk of individual stocks. For example, a new product of a pharmaceutical company failed to pass the FDA review.

Here we introduce a parameter beta value to measure the sensitivity of individual stocks and markets.

Beta coefficient can be calculated in three ways.

1. We can draw a scatter plot with the excess return of the market as the independent variable and the excess return of this stock as the dependent variable (all using the historical actual return minus the return under the risk-free interest rate (commonly used national debt with higher credit rating as the risk rate)), and the slope of the straight line fitted by linear regression is the beta coefficient.

2. The covariance between stock and market return can be divided by the square of variance of market return fluctuation (actually the slope calculated by least square method).

3. Further derivation of the two.

The correlation coefficient ρ ranges from-1 to+1. +1 is a perfect positive correlation.

So if you predict that the next market will be a bull market through macroeconomic analysis, you can construct a stock portfolio to make its beta greater than 1, so that you can get the excess return alpha. Copying a portfolio of risk-free assets with financial products is to adjust the beta value to zero, so that the portfolio you manage is not affected by market fluctuations.

When buying stocks and selling call options or buying put options or shorting stocks, the reverse operation can adjust the beta coefficient of this portfolio to zero. You can also use forward or futures contracts to achieve this goal.

If the portfolio you manage is a bond, then adjust its duration to match the duration you want, that is, immune bond immunity.

If the portfolio you manage is an option, then adjust its delta to 0, that is, delta hedging dynamic hedging.