However, we know that a portfoilio's risk (standard deviation or variance)
is not based on Beta alone. The amount of variance (or standard deviation)
of the portfolio that comes from a particular security is the proportion of
that security in the portfolio times its beta (relative to the portfolio).
Therefore, when I hear, "how much the security CONTRIBUTES to the portfolio
risk," I think of the proportion times the Beta. The Portfolio's risk is
NOT the sum of the individual securities' Beta's but rather the sum of
each security's Beta times its proportion.
I think this has been the focal point of my earlier postings. Page 164 of
the text states, "Ford's contribution to portfolio risk depends on its
relative importance in the portfolio and its average covariance with stocks
in the portfolio." It then defines this and the "proportion of the risk
that comes from the Ford holding," as its proportion times its Beta
(relative to the portfolio). However, in the study guide, the
"contribution to portfolio risk," was just Beta.
It is my opinion that when one is asked a security's "contribution to
portfio risk," the answer is the proportion times the Beta (relative to the
portfolio). Otherwise, the whole does not equal the sum of its parts. I
think the study guide made yet another error in this example.
With 27 members in this study group, does anyone else have an opinion on this?