Difference Between Risk Pooling and Risk Sharing in the Diversification of the Portfolio

Abstract

In this era of stock speculation, knowledge of stocks has become very important. Risk management can help achieve more excellent benefits at the lowest possible cost, while the improper use of the approaches can lead to a counterproductive result. Risk pooling and risk sharing are present in many domains, with entirely different definitions. Many people apply purposes of these two means from other fields to the financial area, without knowing, or just ignoring, their difference. This article uses numerical results to demonstrate the difference between them by building portfolio models to perform calculations. The true impacts of applying these two methods to reduce risk can be found by calculating respectively. Although the two methods do not sound different, they reflect other effects when applied to the same portfolio. By understanding the different roles of the two methods, investors will have a better understanding of portfolio risk management and can avoid the severe consequences of misusing them.