PORTFOLIO RISK

ANALYSIS

BY- SNEHA JHA

 CONTENT

• Investment portfolio risk

• Determining risk tolerance

• Types of portfolio risks

• How to measure the risk of your investment

portfolio

• How to manage the risk of your investment

portfolio
 INTRODUCTION

 All Investors face a trade-off between risk and return.

 Investors are rewarded with returns for taking on risk –

but that risk must be managed.

 For any portfolio, the appropriate level of risk must first

be determined.

 Then the portfolio risk needs to be calculated to make

sure it lies within that level of risk.
 Investment Portfolio Risk

 P o r t f o l i o r i s k r ef l ect s t h e o v er al l r i s k f o r a

p o r t f o l i o o f i n v es t men t s .

 I t i s t h e co mb i n ed r i s k o f each i n d i v i d u al

i n v es t men t wi t h i n a p o r t f o l i o .

 Th e d i ff er en t co mp o n en t s o f a p o r t f o l i o an d

t h ei r wei g h t i n g s co n t r i b u t e t o t h e ex t en t t o

wh i ch t h e p o r t f o l i o i s ex p o s ed t o v ar i o u s

risks.

 Th e maj o r r i s k s a p o r t f o l i o wi l l f ace ar e

mar k et an d o t h er s y s t emi c r i s k s .
 Determining your risk tolerance
Before constructing a portfolio, you need to work out how

m u c h y o u c a n a ff o r d t o l o s e , b o t h f i n a n c i a l l y a n d

p s y c h o l o g i c a l l y.

Losing too much money late in your career may mean

y o u r p o r t f o l i o w i l l n e v e r r e c o v e r.
 Types of Portfolio Risks

 There are l ot s of t ypes of inve stm ent risks, both

at the portfolio l evel and the i ndividua l securit y

level.

 Fi rstly, the following are e xam ples of risks that

are specific t o individual securi ties. These risks

can easily be ma naged through diversificati on:

Liquidi ty risk
Default ri sk
R egulatory risk and polit ical risk
Duration risk
St yle risk
 How to measure the risk of
your investment portfolio

 T h e re a re n u m e ro u s a p p r o a c h e s t o m e a s u r i n g

p o r t fo l i o r i s k . A l l h a v e t h e i r a d v a n t a g e s a n d

d r a wb a c k s .

 T h e re i s n o f u l l p ro o f m e t h o d , s o s e v e ra l m e t h o d s

a re u s u a l l y c o m b i n e d . Vo l a t i l i t y i s t h e m o s t

c o m m o n p r o x y f o r r i s k – t h o u g h t h e re a r e r i s k s t h a t

v o l a t i l i t y d o e s n o t c a p t u re .

 Standard deviation is the typical way to

measure volatility. This applies to individual

securities and to portfolios.

 H o w t o m a n a g e t h e r i s k o f y o u r i n v e s t m e n t p o r t f o l i o

 The stock market has historically generated

the highest returns but has also experienced

the greatest volatility.

 A substantial percentage of most portfolios

should be invested in equities, but this needs

to be balanced with other types of assets.

 A basic diversified portfolio would include

stocks, bonds and cash.

 SYSTEMATIC AND UNSYSTEMATIC RISKS

SYSTEMATIC RISK UNSYSTEMATIC RISK

 Sy stem a ti c r i sk r ef er s to ha za r d w hi ch i s  Unsy stem a ti c r i sk r ef er s to the r i sk

a ssoci a ted wi th the m a r ket o r m a r ket a ssoci a ted wi th the pa r ti cul a r secur i ty,
seg m ent a s a whol e. com p a ny or i nd ustr y.

 It i s not contr ol l a b l e.  It i s contr ol l a b l e.

 It a ff ects l a r g e num b er o f secur i ti es i n  It o nl y a ff ects a p a r ti cul a r co m pa ny.

the m a r ket.
 Conclusion:
Diversify your portfolio across
various asset classes
Understanding and managing portfolio risk is perhaps the most

important role within portfolio management.

The more risk can be quantified and managed, the more capital

can be allocated to riskier assets that generate the highest returns.

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