My difficulty remains the wording. I believe I have found inconsistencies
in defining "contribution to portfolio risk." This wording comes up often
in chapters 7, 8, and the study guide.
I do not see how Beta alone is the contribution to portfolio risk. If you
add up each individual security's beta, you do not get portfolio beta.
Instead, you have to multiply each security's beta by its proportion (or,
for a fully diversified portfolio, take the average of the beta's which is
the same as adding each security's beta times its proportion.)
At 09:31 PM 6/23/98 PDT, Vic Falls wrote:
>Specifically--
>The study guide's formulaic presentation (p. 59, betas) appears to be
>incorrect; however, the guide appears to account for the proportion of
>the holding in the numerical calculation. For example,
>B1=(169/397.4)/0.5 where 0.5 is the proportion of Stock 1 in the
>portfolio.
>
>Generally--
>The study guide is just that: a guide. Many of us have yet to come
>across a perfect guide.
>
>Cheers!
>
>
>mmckenne@ins.state.pa.us wrote:
>
><snip>
>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.
><snip>
>
>
>
>
>
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