Question

You are to discuss the advice you would give a client who is investing with you about portfolio risk

Answer 1

Every portfolio contains two types of Risk - first one is Systematic Risk and second is Unsystematic Risk.

Systematic Risk denoted by beta ( ) are those risks which are beyond the control of company for example war, political unrest, natural disasters, economic decline, and weather. these affects entire industry and market. we can reduce this risk by adding those securities whose beta are lower.

Unsystematic Risks are those risks which can control by company it is a company specific risk and these can be reduced by diversification of securities. for example Bad results, decline in sales, decline in profit, fire in company etc.

We can check the Risk bearing capacity of a particular client if he is a risk taker than we can add more risky stocks in his portfolio and if he don't want to take any risk then we choose low beta stocks and use permutation and combination for selection of low risk securities portfolio.