The 5 Riskiest Stocks in the Dow: Bank of America Corp (BAC), Alcoa Inc (AA), Caterpillar Inc. (CAT)

Most investors see the Dow Jones Industrial Average 2 Minute (Dow Jones Indices:.DJI) as among the safest blue-chip stocks in the entire market. But some of the Dow’s 30 components are riskier than others, and just because a stock is in the Dow doesn’t mean that it’s invulnerable to market reversals. Own the wrong stocks when the market starts to decline, and you could magnify your losses.

Bank of America (NYSE:BAC)

One way of measuring the risk of a stock is by looking at its share-price volatility. Using a metric called beta, you can see which stocks have had the biggest rises and falls in response to changing market conditions in the past. By that measure, let’s look at the five riskiest Dow stocks over the past five years.

Bank of America Corp (NYSE:BAC), beta = 2.40
The fact that Bank of America tops the list of riskiest Dow stocks should come as no surprise. Bank of America Corp (NYSE:BAC) was one of the hardest-hit banks during the financial crisis, as its buyouts of Countrywide and Merrill Lynch greatly heightened the risks it had already taken in its own core banking operations. Even now, the bank has a leverage ratio of 9.3, which is more than many of its domestic traditional-banking peers.

Still, Bank of America Corp (NYSE:BAC) has taken many steps to get less risky in recent years. Passing the Federal Reserve’s stress tests earlier this month shows how far Bank of America Corp (NYSE:BAC) has come, and even with $5 billion in share buybacks coming, the bank’s decision not to increase its dividend will leave Bank of America Corp (NYSE:BAC) in a more stable capital position as it continues to earn profits and bolster its balance sheet.

Alcoa Inc (NYSE:AA), beta = 2.10
The commodity space has always been risky, as business cycles push various commodities in and out of favor. Aluminum has been one of the most volatile of commodities in recent years, as changing global economic conditions in the construction and infrastructure industries have sent industrial metals rising and falling sharply. With major Chinese aluminum producers getting subsidies to boost production despite low prices, Alcoa Inc (NYSE:AA) suffers the consequences of a glut of supply on the global market.

Still, Alcoa has taken steps to maximize its eventual benefit when the business cycle turns higher. Seeking strategic acquisitions and looking to build partnerships with China, Alcoa Inc (NYSE:AA) could turn its woes into greater profits when the tide turns.

Caterpillar Inc. (NYSE:CAT), beta = 1.91
Caterpillar Inc. (NYSE:CAT) is similarly exposed to world economic conditions. As the giant in the construction-equipment industry, Caterpillar Inc. (NYSE:CAT) needs healthy economies around the globe to support its business. Yet lately, higher competition and weaker activity levels, especially in China, have hurt the company. As far out as 2015, Caterpillar remains skeptical of its ability to grow to its maximum potential.

Still, because of Caterpillar’s global breadth, it may be able to avoid the full brunt of a stock-market downturn if that downturn is caused by domestic considerations. Caterpillar Inc. (NYSE:CAT) does do substantial business within the U.S., but the benefit of global diversification can help in anything short of a global stock-market collapse.