Reading 19-lifetime financial advice:Human capital, asset allocation and life insurance. As mentioned Financial market risk is one of the three primary risks destroy desire lifestyle in retirement. While it says “Financial market risk can be redused by modern portfolio theory (diversification)”, I am confused here. I think Financial market risk=system risk, diversification can only reduce unsystem risk. so why Financial market risk can be redused by modern portfolio theory (diversification)?
Financial market risk = systematic + unsystematicl risks Diversification allows eliminating unsystematic risks and, thus, reduces market risk
Financial refers to asset class investments such as stocks , bonds, real-estate etc. Market risk is price , interest rate or value risk. It does not say that Market risk is only systematic risk. It includes unsystematic rsk too , which can be reduced through diversification using MPT. Don’t understand why you’re reading too much between the lines here
Thanx guys, The key point is: Financial market risk = systematic + unsystematicl risks I just want to get through every point in the notes.