Unformatted text preview: The market portfolio has the greatest possible diversification, and therefore has eliminated all the diversifiable risk. The market portfolio contains only the risk that cannot be diversified away. The risk of the market portfolio is the systematic risk , which is also called nondiversifiable risk or market risk . Nonsystematic risk can always be eliminated by holding a well-diversified portfolio. Therefore, obtaining the benefits of diversification is "free". Therefore, investors will not receive compensation for nonsystematic risk as is can be eliminated at no cost.--------------Note: Systematic and nonsystematic risk will be examined quantitatively in Topic V....
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- Summer '08
- Capital Asset Pricing Model, Modern portfolio theory