Portfolio Risk is composed of the following risks:
- Systematic Risk or Market Risk
- Non-Systematic Risk or Non-market Risk
Market Risk refers to the risk common to all stocks and the risk cannot be diversified in the same market e.g. Singapore stock market
Non-Market Risk is the risk associated with the stock of that particular company. Non-systematic risk can be diversified away by holding greater number of stocks in the portfolio.
In Joel Greenblatt's brilliant book, You Can Be a Stock Market Genius, he provides the following statistics by owning the following number of stocks:
- 2 stocks eliminates 46% of non-market risk of just owning one stock
- 4 stocks eliminates 72% of the risk
- 8 stocks eliminates 81% of the risk
- 16 stocks eliminates 93% of the risk
- 32 stocks eliminates 96% of the risk
- 500 stocks eliminates 99% of the risk
Have you done a good job in your Portfolio management to mitigate the Non-Market Risk?
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