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Unformatted text preview: return from the expected return. Total risk of Portfolio is due to two types of Risk: Systematic (or Market risk) is risk that affects all firms (ex. Tax rate changes, war) Unsystematic or company unique risk(ex. Labor strikes, CEO change) If two stocks are perfectly positively correlated, diversification has no effect on risk. If two stocks are perfectly negatively correlated, the portfolio is perfectly diversified. Beta is the risk that remains for a company even after we have diversified our portfolio. A stock with a Beta of 0 has no systematic risk A stock with a Beta of 1 has systematic risk equal to the typical stock in the marketplace A stock with a Beta exceeding 1 has systematic risk greater than the typical stock...
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