Standalone Risk

Standalone risk is the risk associated with a single operating unit of a company, a company division, or an area or asset, as opposed to a larger, well-diversified portfolio.

Standalone involves the risks created by a specific division or project, which would not exist if operations in that area were to cease.

All financial assets in a portfolio context can be examined in a portfolio context or on a stand-alone basis, when the asset in question is thought to be isolated. While a portfolio context takes all of the investments and assessments into account when calculating risk, a standalone risk is calculated in assuming that the asset in question is the only risk and value that the investor has to lose or gain.

Standalone risk measures the dangers associated with a single facet of a company's operations or by holding a specific asset, such as a closely-held corporations. In portfolio management, standalone risk measures the undiversified risk of an individual asset. For a company, standalone risk allows them to determine a project's risk as if it were operating as an independent entity. Investors may examine the risk of a standalone asset to contrast their value against the risk and help predict their expected return of investment. Standalone risks have to be carefully considered because as a limited asset, an investor stands to either see a high return if the value of the asset increases, since it is the sole asset, but on the other hand, an investor could stand to lose the entire value of the asset because it is the only one.

A standalone risk can be measured with a total beta calculation or through the coefficient of variation, which is a measure used in probability theory and statistics that creates a normalized measure of dispersion of a probability distribution.

After calculating the coefficient of variation, the value of that coefficient of variation can be used to analyze the expected return along with the expected risk value. For example, a low value coefficient of variation would indicate a higher expected return with lower risk, while a higher value coefficient of variation would lend itself to having a higher risk and possible lower expected return. The coefficient of variation is thought to be especially helpful because it a dimensionless number, meaning that, in terms of financial analysis, it does not require inclusion of other risk factors, such as market volatility.