If the CML uses market portfolio and market portfolio doesn’t have unsystematic risk, why does it still measure risk by standard deviation which includes systematic and unsystematic risk? Please help. Thank you very much!!!
wouldnt it be the same thing, though? unsystematic risk on the market portfolio = 0. So if the standard deviation = total risk = systematic + unsystematic risk, and unsystematic risk is 0, does that get us to the same place? God i hate the portfolio management readings!!!
Can anyone explain? Thanks!
smileygladhands is correct. Within the market portfolio, asset specific risk (unsystematic risk) will be diversified away to the extent possible. Systematic risk is therefore equated with the risk (standard deviation) of the market portfolio.
very helpful. thanks.