This paper takes an argument to prove that individual stock cannot allow investors to help judging the overall risk associated with investment on shares. A critical criticism context will also be introduced in the paper later on to justify the argument regarding risk being judged better in a portfolio of stocks.
It will not be incorrect to state that investors of stock market are directly associated with the risk which is not avoidable. These risks can be variable in types such as short-term risk or portfolio risk. For the focus of this paper, portfolio risk is being discussed in a contextual manner. It should be noted that portfolio risk is relatively low in accordance to the movements within the stock market. Herein, the process or concept of aggregation is considered for calculating risk associated with an asset or for valuing a company. It is due to this reason that individual investors are suggested to manage their portfolio risk because their individual transactions are aggregated. This denotes that investors tend to diversify their assets in order to judge the risk of security (Brealey, et al., 2010).
It is not being proven here that by taking an aggregate of the risk of in a portfolio can eliminate risk. Portfolio of stock allows the investors to understand the associated risk in accordance of variation in all levels of the market. There is an underlying condition associated with portfolio risk. As a matter of fact, risk can be best judged in a portfolio context, as diversified stocks can have reduced risk. The underlying condition is that the return which is received by the investors is less than one. In this case, it is stated that diversification will remain beneficial or the investors (Brealey, et al., 2010).
Risk or systematic risk is interlinked with the changes that may occur in the market. The risk is ...Show more