Question

Business Finance
Detailed analysis of statistical methods to access stand alone risk?

Answer 1

Standalone risk is the risk associated with a single operating unit of a company, a company division, or an area or asset, as opposed to a larger, well-diversified portfolio.

BREAKING DOWN Standalone Risk

Standalone involves the risks created by a specific division or project, which would not exist if operations in that area were to cease.

All financial assets in a portfolio context can be examined in a portfolio context or on a stand-alone basis when the asset in question is thought to be isolated. While a portfolio context takes all of the investments and assessments into account when calculating risk, a standalone risk is calculated in assuming that the asset in question is the only risk and value that the investor has to lose or gain.

Standalone risk measures the dangers associated with a single facet of a company's operations or by holding a specific asset, such as a closely-held corporation. In portfolio management, standalone risk measures the undiversified risk of an individual asset. For a company, standalone risk allows them to determine a project's risk as if it were operating as an independent entity. Investors may examine the risk of a standalone asset to contrast their value against the risk and help predict their expected return of investment. Standalone risks have to be carefully considered because as a limited asset, an investor stands to either see a high return if the value of the asset increases, since it is the sole asset, but on the other hand, an investor could stand to lose the entire value of the asset because it is the only one.

Example of a Standalone Risk

A standalone risk can be measured with a total beta calculation or through the coefficient of variation, which is a measure used in probability theory and statistics that creates a normalized measure of the dispersion of a probability distribution.

Methods to calculate standalone risk -

Beta Factor

Risk & Return Consideration

Systematic Risk

Volatility

Sensitivity Analysis

Scenario Analysis

Decision Trees