Question

how and why should the process of risk analysis be different for an investor who was simply trying to determine which stocks to add to a well- diversifieed portfolio?

Answer 1

A well-diversified portfolio is the one that consists of different types of securities.

A different risk analysis should be done as there are different types securities that are linked with different sectors and industries.

Therefore, different risk analysis should be done for different areas of securities, when a different stock is added to the portfolio.

The portfolio is constructed in such a way that the risk is minimized.

Process of risk analysis:

• The risk analysis should be done by analyzing the factors that are influencing the risk such as the market conditions, inflation etc.

• It is done by assessing the risky areas and plans are to be avoid such risk.

• Implement the plan of risk management plan.

• Evaluate the performance of the securities.

• Review the riskiness of the portfolio.

• If there is any discrepancy in the stock performance remove the stock and add different stock.

• Revise the portfolio.