Market model Estimates X, has return = .05+.7Rm + error W, return= .02 +1.5Rm +error X & W are equal variance funds which fund has higher systematic risk unsystematic risk a X X b. X W c. W X explain your answer sil vous plait
[W(systematic) = 1.5] > [X(systematic) = 0.7] W(variance) = X(variance)
C W has a higher Beta than X, measure of systematic risk.
C W has higher beta so that means X has higher unsystematic
What they said. Unsystematic risk (diversifiable) The risk that can be diversified away Example: Risk of warehouse fire Systematic risk (market risk) Risk that cannot be diversified away Example: Risk of changing interest rates Remember: Total risk (σ) = systematic + unsystematic risk
C B1 i.e. Slope i.e. Expected Market Return i.e. Beta is higher for W than X.
C. The slope of market model is the systematic risk (think of beta in CAPM sense), so W has higher systematic risk. (that automatically makes the answer choice C) However, since they both have the same variance, W has the higher return for a given return on the market portfolio, holding the same variance as X, which means that X has more unsystematic risk (you can diversify more from X to get a better expected return).