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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
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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This document was uploaded on 01/14/2014.
- Winter '14