Question

Discuss what distingusihes a stand-alone risk from a portfolio risk.

Explain: i) expected rate of return;

ii) probability

Answer 1

Stand alone risk: Any individual asset which have a undiversified risk is called a stand alone risk

Ex: If we are investing all money over only single stocks than it is a stand alone risk as if the value of assets may increase or decrease. If it decreases every single penny will be a loss

Portfolio risk: Risk which is diversified over various portfolio of assets is called portfolio risk.

Ex: If we invest money in different % in different asset class than the risk is low.

1) Expected rate of return: Any investor after investment will expect the profit or loss on that investment. Hence the return that we expect on any investment is called expected rate of return.

2) Probability: The chance of occurence of any event out of all the possible events is called probability.

Probability = ( occurence of event)/(Total number of events)

Ex: If I toss a coin the probability of occurrence of tail is (1/2)

Here 2 is the total number of outcome which is head and tail where 1 is the occurrence of tail.