CAPM, Beta, SML, EMH - Capital Asset Pricing Model A. In...

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Capital Asset Pricing Model A. In the section on risk and return, we learned that you can decrease risk by diversifying holdings in a portfolio. B. What happens when we add more assets to our portfolio? C. Two types of risk. 1. Asset-specific, or diversifiable risk (unsystematic risk) 2. Nondiversifiable risk related to market fluctuations (systematic risk) D. By diversifying an asset portfolio, we can eliminate asset-specific risk, but not market risk. E. If we are interested in the risk of a portfolio, how should we measure the risk of a single asset in that portfolio? The relevant riskiness of an individual stock is its contribution to the riskiness of a well-diversified portfolio. F. Are all stocks equally risky in the sense that they have the same impact on a well-diversified portfolio? The risk that remains after diversification is market risk, and this risk can be measured by the degree to which a given stock tends to move in relation to the market.
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This note was uploaded on 02/01/2009 for the course ACTG 6610 taught by Professor Ward during the Spring '09 term at Middle Tennessee State University.

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CAPM, Beta, SML, EMH - Capital Asset Pricing Model A. In...

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