What is the difference between portfolio risk and stand-alone risk? W
QUESTION
What is the difference between portfolio risk and stand-alone risk? What is the relevance of each to an investor (or, is each relevant?)? As an investor, how do you consider each in making investment decisions?
In portfolio management, standalone risk measures the undiversified risk of an individual asset. So, for example, by investing just in Microsoft stock, you would subject your portfolio to standalone risk (and standard deviation of returns) of a single company and industry sector (high technology). Portfolio risk is the diversified risk of a whole portfolio of assets. So, if your investment
portfolio held 50% large company stocks, 25% international company stocks, 15% small cap stocks and 10% bonds, your portfolio would have an expected risk (standard deviation of returns) to it vs. a different portfolio that had a different makeup of investments.
ANSWER:
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