1. What is Total Risk?

Total Risk represents the overall risk of an investment portfolio, combining both systematic (market) risk and unsystematic (specific) risk. It provides a comprehensive measure of investment volatility and potential losses.

2. How Does the Calculator Work?

The calculator uses the Total Risk formula:

Where:

• \( \text{Systematic Risk} \) — Market risk that affects all investments (%)
• \( \text{Unsystematic Risk} \) — Specific risk unique to individual investments (%)

Explanation: The formula calculates the square root of the sum of squared systematic and unsystematic risks, providing the overall portfolio risk measure.

3. Importance of Total Risk Calculation

Details: Understanding total risk is crucial for portfolio management, risk assessment, investment decision-making, and determining appropriate asset allocation strategies.

4. Using the Calculator

Tips: Enter systematic risk and unsystematic risk as percentages. Both values must be non-negative numbers representing the risk components of your investment portfolio.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between systematic and unsystematic risk?
A: Systematic risk affects the entire market (e.g., interest rates, inflation), while unsystematic risk is specific to individual companies or sectors (e.g., management changes, product failures).

Q2: Can total risk be eliminated through diversification?
A: Only unsystematic risk can be reduced through diversification. Systematic risk remains and affects all investments in the market.

Q3: What are typical values for total risk in investment portfolios?
A: Total risk typically ranges from 5% to 25% for most diversified portfolios, with higher values indicating greater volatility and potential returns.

Q4: How does this relate to standard deviation in portfolio theory?
A: Total risk is often measured as the standard deviation of portfolio returns, with this formula specifically separating the two risk components.

Q5: Should investors focus more on systematic or unsystematic risk?
A: Investors should focus on managing systematic risk through asset allocation, while unsystematic risk can be minimized through proper diversification across different securities and sectors.