Business Finance
Portfolio and Individual stocks

Question Description

Should portfoliio effects impact the way investors think about the risk of individual sotcks?

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Final Answer

Portfolio diversification does affect investors view of risk. A stocks total, or stand alone, risk as measured by its CV. It might be important to an undiversified investor, but it is not relevant to a diversified investor. A rational risk averse investor is more interested in the impact that the stock has on the riskiness of his or her portfolio then on the stand alone, or total risk. Stand alone risk is composed of a diversified, or company specific risk which can be eliminated by holding the stock in a well diversified portfolio.

Gabriel E (1551)
Cornell University

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