Which of the following statements best describes the concept of systematic risk? systematic risk: a. remains even for a well diversified portfolio b.is approximately equal to total risk divided by unsystematic risk c.as measured by the standard deviation is the only risk rewarded by the market d is present in portfolio investing, but not when investing individual securities. The answer given is a however can someone explain why c is incorrect? Thank you.
Standard deviation measures total risk = systematic + non systematic risk. Beta is the only risk rewarded by the market because you can diversify all the non systematic risk away.
Why ‘A’ --------- A. For the best diversified portfolio we have no unsystematic risk but we still have firm-specific risk called the systematic risk!! Why not ‘C’ -------------- STD incorporates both systematic and unsystematic risk and market pays you nothing for talking on that unsystematic risk. So Beta is the only reward by the market
Upps i know why? Beta is a measure of systematic risk.
dinesh.sundrani Wrote: ------------------------------------------------------- > A. For the best diversified portfolio we have no > unsystematic risk but we still have firm-specific > risk called the systematic risk!! Dinesh: I think you misspoke. Firm-specific risk is unsystematic (a.k.a. diversifiable) risk. For well diversified portfolios, firm-specific risks from the individual assets pretty much offset each other and is eliminated.
Thanks busprof - for correcting. I just messed up those risk terminologies in haste … and ofcouse it was a sunny-saturday morning and I was doing remeasurements, temporals, translations, currents, bla… Good catch!