Shortages 20 20 returns total return expected return

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Unformatted text preview: rn Unexpected return = systematic portion + Unexpected unsystematic portion unsystematic Therefore, total return can be expressed as Therefore, follows: follows: Total Return = expected return + systematic Total portion + unsystematic portion portion 21 21 Diversification Portfolio diversification is the investment in Portfolio several different asset classes or sectors several Diversification is not just holding a lot of assets For example, if you own 50 Internet stocks, you For are not diversified are However, if you own 50 stocks that span 20 However, different industries, then you are diversified different 22 22 Table 13.7 23 23 The Principle of Diversification Diversification can substantially reduce the Diversification variability of returns 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 24 24 Figure 13.1 25 25 Diversifiable Risk The risk that can be eliminated by combining The assets into a portfolio assets Often...
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