Description
Answer Question 1 and write a short paper separately:
Q1: Describe the difference between stand-alone risk and portfolio risk.
Select a company of your choice and research the Bonds, Bond valuation, and return on Capital Assets of that company (i.e. GE Capital, Wal-Mart, Apple, Google, Yahoo, IBM, Boeing, Target ...etc) and explain how healthy or unhealthy the company is based on your findings.
Explanation & Answer
View attached explanation and answer. Let me know if you have any questions.
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Finance
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In finance, risk defines a latent financial loss that can be attributed to an investment
decision or the degree of uncertainty concerning a certain investment decision (Eckert, 2017).
Fundamentally, a rise in investment risks make both investors and shareholders to seek higher
returns as a comeback strategy. Most importantly, every investment or saving has different risks
and returns. The difference includes how readily the investors will get the money when they need
it, how safe the money will be and how fast it will grow. Risk is the probability that the final results
of an investment or saving will differ with the expected results. An individual or a firm needs to
carefully evaluate their stability before making any risk especially financial ones because they can
easily collapse the financial health of that particular firm.
A standalone risk defines the consequences related with investing in a particular section or
division of a firm. A normal risk pertains a wide range of instruments where investors can take
risks and rewards but in standalone risk, one has to major in a specific instrument. For instance,
an entire investment portfolio will depend on the performance of a single security in a situation
where the investor invests in a single type of a stock (Mizgier, 2017). However, depending on the
performance of the firm that gave out the stock, the stock can either grow in value or lose its value.
Portfolio risk on the other hand is the type of risk that involves a combination of many
assets or stock. Each investment or stock within the portfolio risk carries its own risk, with a higher
potential return. However, it is easy to eliminate portfolio risk based on theory through successful
diversification. Investors and traders should wary of portfolio risk because most risks apply to
individual investments and it is necessary to ensure that the risk does not work against you to
maintain a healthy financial state.
There is a difference between the standalone risk and the portfolio risk. Their difference
ranges from their definition, or how they occur, their risk measures, diversification and their risk
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consideration. Firstly, from their description, standalone risk caters for a particular or specific
instrument or division whereas a portfolio risk defines a combination of assets or units. In simple
terms, standalone risk in most cases occur due to lack of diversification whereas in portfolio risk
the assets are in a portfolio form or a number of units.
The other difference is in terms of their risk measures. Risk measures define historical
predictors of investment risk and volatility (Chen et al., 2017). The measure of risk involves the
process of identifying and analyzing the risk involvement in an investment. The risk measures of
standalone risk include individual variance, individual standard deviation and coefficient of
variance. In portfolio risk, the risk measures are portfolio covariance, portfolio standard deviation
and portfolio variance.
Diversification is a method of risk management whereby the investors normally spread
their initial outlay in several portfolios as a way of managing their investment risks. Notably,
diversification eliminates unsystematic risk. In standalone risk, it measures the undiversified risk
of an individual unit or asset. In portfolio risk, diversificati...
