Correct me if im wrong. An individual security will always have more unsystemtic risk than the market portfolio. However, it is possible for an individual security to have less TOTAL risk(systematic and unsystematic) than the market portfolio.
Hmm… an individual stock and the market portfolio will both have systematic risk but only the individual stock will have unsystematic risk… if it is possible that the individual stock have less total risk that means it’ll have less systematic risk… I think you can diversify away some systematic risk by globally diversifying your market portfolio but I dont think an individual stock will have less systematic risk than a market portfolio.
> An individual security will always have more unsystemtic risk than the market portfolio. A bond has less unsystemtic risk than the market, so is any security with beta < 1.0, no?
with beta < 1, the systematic risk of an individual stock is lower than risk of market portfolio, therefore it can happen that the total risk of an individual stock is lower than risk of market portfolio mean-variance analysis (for instance) shows there are many stocks/portoflios that have lower total risk compared to total risk of market portfolio what I am not sure is what happens with the risk when beta is negative, but I assume it is not part of LII curriculum
I think you can have lower risk and lower return (think of a risk-free investment). They haven’t talked about negative beta in the material, but let us see. If a stock is perfectly negatively correlated with the market (which can happen if you have a portfolio shorting the market … something I wish I had done considering today’s outlook), your beta is -1 (right?). So your portfolio’s standard deviation is the inverse of the market’s, which means your risk is 2 times the market? Or is it minus 1 x the market’s risk? hmmmm.
If SD(Asset) < SD(Market), then the asset has less total risk than the market portfolio. That same asset can have more non-systematic risk than the market because the market has zero non-systematic risk (by definition), and the asset has zero or (more often) positive non-systematic risk. The way this can happen is if the asset’s beta and asset-specific risk is small enough such that (Beta*SD(Mkt))^2 + (SD(Asset_specific))^2 < (SD(Mkt))^2 If beta and SD(Asset-specific risk) are both small enough, then this is possible.