Standalone risk describes the danger associated with investing in a particular instrument or investing in a particular division of a company. A typical investment portfolio contains a wide array of instruments in which case investors are exposed to a large number of risks and potential rewards. In contrast, a standalone risk is one that can easily be distinguished from these other types of risk.
When an investor only invests in one type of stock, then his or her entire investment returns depend on the performance of that security. If the company that issued the stock performs well then the stock will grow in value but if the firm becomes insolvent then the stock may become worthless. Therefore, such an investor is exposed to standalone risk because that individual's entire investment could be lost due to the poor performance of a single asset. Additionally, someone who invests in a wide array of securities is also exposed to standalone risk if that individual holds each type of instrument in a separate brokerage account. In such situations, the investor would not lose everything if one asset dropped in value, but each holding account would expose the investor to a different standalone risk since each account would only hold one type of security.
Like private investors, major corporations including investment firms are exposed to standalone risk. A flood insurance division of a major financial firm is exposed to the risk that large numbers of hurricanes or coastal flooding could cost the firm a significant amount of money in terms of policy payouts. The health insurance and automobile insurance divisions of the same firm would not expose the company to this same risk because these types of policies do not provide the insured with payouts that are related to water damage.
Many investors attempt to address standalone risk by expanding portfolios to include other types of securities and assets. An insurance company cannot completely eliminate the risk associated with flooding by selling other types of policies but a firm that sells life, health and automobile insurance policies is less likely to have financial problems after a major storm than a firm that only sells flood policies. From a structural point-of-view, some firms register different company departments as separate legal units to protect the entity from the risks associated with one division of the firm or one type of asset. If all of a firm's holdings operate as one single structure, then creditors and investors of the firm may attempt to seek damages if the failure of one division of the company causes those groups and individuals to lose money. When a firm registers its various business units as separate legal entities, then creditors and investors cannot attempt to offset losses by claiming assets that are held by one of the firm's other units.
