Understanding your portfolio’s top risk contributors helps manage portfolio risk. Possible insights include:
• Diversification. The portfolio’s overall risk may be lower than individual components thanks to the benefits of diversification, which is a powerful allocation strategy for reducing risk. Read more about the finance use of ‘diversification’ at Investopedia and Wikipedia.
• Position Risk and Position Size.Sometimes you will see that a more volatile position (higher dot) can contribute less to the overall portfolio risk (shorter bar) than a less volatile position which has a bigger weight in the portfolio. Volatile Tesla (TSLA), for example, may not be a big source of portfolio risk if it is relatively a small holding compared to a less volatile holding such as Pfizer (PFE).
• Position Risk and Market Risk.Compare the implied volatility of individual positions (the dots) to see if they are above or below the market’s implied volatility.
Risk tools such as Portfolio Risk Contribution and Adaptive one-click downside protection can help investors dial down portfolio specific risk and limit losses by changing the way we invest with downside protection.