Source: Reading 60 - Schweser pg. 175 (top of page)
Question: Can standalone risk be represented by both beta and standard deviation for a well-diversified portfolio? My initial thoughts: We know that beta is represented by the independent variables in the SML - and since beta includes the market portfolio, it can be said that beta reflects systematic risk. Standalone risk, in contrast, has inclusion of both systematic and unsystematic risk - however, this is only true for a concetrated portfolio. For a well-diversified portfolio, standalone risk is only systematic risk because unsystematic risk has been eliminated. So, this means - for a well-diversified portfolio, standalone risk (represented by standard deviation) equals systematic risk - BUT systematic risk is also represented by beta, which leads us to conclude that standalone risk can be both represented by standard deviation and beta. Is this right?
I’m not sure to understand what ‘standalone’ mean in this case. If this means something like "financial product risk’, then I would say that beta represents only the systematic part of the whole standalone risk.
adding a large # of stocks will cause diverisifcation to the extent of being able to eliminate only SPECIFIC RISK. (or unsystematic risk). Market risk is still left behind, even after all the diversification that you do.
Just want to say I think the Beta for P is not stdDev_p/stdDev_m. It should be the correlation between the portfolio and the market. Like if actually want Beta in real life we would regress the profolio’s return with the market to find the R^2.
So it’s COV(Portfolio, Market)/Variance(Market). Correct me if I am wrong.