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Weusethebetacoefficienttomeasure systematicrisk

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Unformatted text preview: n considered the same as unsystematic, unique or asset­specific risk If we hold only one asset, or assets in the same industry, then we are exposing ourselves to risk that we could diversify away The Portfolio Standard Deviation The Portfolio Standard Deviation Standard Deviation of Return Unsystematic (diversifiable) Risk Total Risk Systematic Risk Standard Deviation of the Market Portfolio (systematic risk) Number of Stocks in the Portfolio Table 13.7 Table 13.7 Total Risk Total Risk Total risk = systematic risk + unsystematic risk The standard deviation of returns is a measure of total risk For well diversified portfolios, unsystematic risk is very small Consequently, the total risk for a diversified portfolio is essentially equivalent to the systematic risk Systematic (Market) Risk Principle Systematic (Market) Risk Principle There is a reward for bearing risk There is no reward for bearing risk unnecessarily The expected return on a risky asset depends only on that asset’s systematic risk since unsystematic risk can be diversified away Measuring Systematic Risk Measuring Systematic Risk How do we measure systematic risk? We use the beta coefficient to measure systematic risk Beta measures a stock’s m...
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