7 table the principle of diversification the

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Unformatted text preview: ns without an equivalent reduction in expected returns reduction This reduction in risk arises because worse than This expected returns from one asset are offset by better than expected returns from another better However, there is a minimum level of risk that However, cannot be diversified away and that is the systematic portion systematic Figure 13.1 Figure Diversifiable Risk Diversifiable The risk that can be eliminated by combining The assets into a portfolio assets Often considered the same as unsystematic, Often unique or asset-specific risk unique If we hold only one asset, or assets in the same If industry, then we are exposing ourselves to risk that we could diversify away that Total Risk Total Total risk = systematic risk + unsystematic risk The standard deviation of returns is a measure The of total risk of For well-diversified portfolios, unsystematic risk For is very small is Consequently, the total risk for a diversified Consequently, portfolio is essentially equivalent to the systematic risk systematic Systematic Risk Principle Systematic There is a reward for bearing risk There is not a reward for bearing risk There unnecessarily unnecessarily The expected return on a risky asset The depends only on that asset’s systematic risk since unsystematic risk can be diversified away diversified Measuring Systematic Risk Measuring How do we measure systematic risk? We use the beta coefficient to measure We systematic risk systematic What does beta tell us? A beta of 1 implies the asset has the same beta systematic...
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This note was uploaded on 04/13/2010 for the course BUSINESS engl 102 taught by Professor Seyhanözmenek during the Spring '10 term at Middle East Technical University.

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