Why is it "risky"? Pretty strong word to use to mean they may not impress the interviewer. Besides relevant demos are almost always good in my experience.
Imagine if you knew how to develop databases very well, it was your company's core competency and you were (rightfully) opinionated about it. Now imagine you're interviewing someone, and they show you a database they developed, ostensibly to demonstrate familiarity or initiative with the subject matter. Except it's not a database at all, and it doesn't at all match the specification for what your firm (or similar firms) would consider a database. It's just a peculiar method of storing data in a custom file structure.
If you attempt to develop a trading algorithm independently and without prior training, you are approximately certain to design something from first principles that is utterly unlike what professionals do on a day to day basis. Take a look at /r/algotrading (or similar forums) sometime and read about the preconceived notions people have about that a trading algorithm is and what it takes to develop one. These are programmers who read about the subject matter, not simpletons. It's just that there is far more development and strategy work for the modal trading algorithm to be close to something resembling professional work, and the unknown unknowns are very difficult to eliminate without explicit guidance.
That's not to say it's literally undoable, I am aware of people who successfully do it. It's just risky, because you have far higher downside than upside in trying to go that route and present your work to a firm. The problem is not just that you might not impress the interviewer, but that they may (for better or worse) believe you have a lot that needs to be "unlearned."
I know nothing about trading, but my expertise is databases and search. If someone built a toy database or search engine, I would be impressed even if it didn't come close to Postgres, Elasticsearch, etc. Especially since they would likely be able to answer questions that others would miss, including experienced people, because they built it from scratch. I find it hard to believe that algorithm trading interviews are fundamentally different to every other CS discipline in regards to demos.
In addition, the word "risk" implies danger. There is no danger in failing an interview. Absolutely none. No one dies. No one loses a leg. No one becomes homeless.
To put my actual point more succinctly: yes, I agree a relevant portfolio item is generally a net positive; my concern is that most candidates without prior experience will develop a "trading algorithm" which is actually irrelevant to the process of trading in most firms. It's not about developing something past "hello world" quality, it's about developing something that resembles what the interviewer agrees is a trading algorithm.
What is the algorithm's core strategy? How was this strategy developed? Was it backtested? Did you overfit? Are you sure? Did you forward test on out of sample data? How does it weight the inputs for identifying eligible securities? Does it dynamically alter these weights in response to real time data? So then how does it process streaming data in a performant way? What time resolution does it require for the data? Okay, now that it's identified eligible securities, how does it manage risk and portfolio size? How many positions can be open and how much of the available capital can be utilized? Why and how are these specific limits enforced? But wait, how is it executing trades? How does it minimize market impact and slippage? How does it attempt to anonymize trades? Are you sure your algorithm isn't predictable? Can it be baited by market makers (i.e. your algorithm is trying to increment up to a minimum bid that will be sold to, which a market making algorithm takes advantage of by raising their price ahead of you)?
If a candidate develops an algorithm that handles considerations like these and can reason about them intelligently (if not necessarily correctly) in an interview then yes, it's impressive. They don't need it to be complete and ready to deploy, they need to understand why all of these things matter. If they don't, they haven't developed a trading algorithm, they've just slightly automated point and click trading on an Interactive Brokers GUI.