# Portfolio risk



## esforonine (7 February 2015)

Consider 3 portfolios:
1) Invest 100% into a banking stock with beta=2,
2) Invest 100% into a resources stock with beta=2,
3) Invest 50% into the banking stock & 50% into the resources stock.
According to modern portfolio theory, all 3 options have the same portfolio beta. Yet most people would consider option 3 to be less risky due to being diversified. 

Is there a way to measure non-systematic or "diversifiable risk" when comparing portfolios?


----------



## DeepState (7 February 2015)

There is a difference between beta and total risk.  Total risk includes concepts of diversifiable risk.  Portfolios with the same beta can have vastly different total risk.  Portfolios with higher effective diversification for the same beta exhibit lower total risk.

Yes, you can calculate idiosyncratic risk.  The approach is usually explained in introductory finance texts and is the residual of the regressions required to determine beta.


----------



## galumay (7 February 2015)

I think you also need to consider whether beta is even a valid metric for risk. It is a construct of the discredited CAPM and the  Efficient Markets Hypothesis.


----------



## StockTrader010 (23 February 2015)

esforonine said:


> Consider 3 portfolios:
> 1) Invest 100% into a banking stock with beta=2,
> 2) Invest 100% into a resources stock with beta=2,
> 3) Invest 50% into the banking stock & 50% into the resources stock.
> ...




MPT has nothing to do with beta. Moreover, MPT would also conclude that option 3 is the least risky, unless the resources stock and the banking stock are perfectly correlated.


----------

