Modification of the classic approach to minimizing the risk of a securities portfolio

Managing a portfolio of securities is one of the fundamental activities of any investor. As part of this process, investors adjust the proportions of financial instruments in the portfolio to match an acceptable level of risk. Most commonly, investors exhibit high risk aversion and therefore focus on low-risk securities. In contrast, those with low risk aversion or a preference for risk tend to invest in high-volatility securities. This article focuses on the former approach—the search for a portfolio that minimizes risk. The classical approach to this problem demonstrates that, through diversification of financial instruments with varying risk levels, it is possible to construct a portfolio whose overall risk is lower than that of the safest individual asset within it. Therefore, investing in a single safe asset is not considered optimal. However, it is also worth exploring alternative approaches to portfolio risk management. The objective of this article is to assess the implications of changing the risk minimization criterion from minimizing total risk, measured by the variance of return rates, to minimizing the portfolio’s volatility coefficient. While this alternative approach may involve a higher absolute level of risk, it allows for a reduction in relative risk—i.e., risk in relation to expected return. Such a strategy may be recommended for highly risk-averse investors, as accepting a slightly higher level of risk than the absolute minimum may yield a relatively higher return.