Chapter 7
Diversification - Spreading a portfolio over many investments to avoid excessive
exposure to any one source of risk.
Panel A – All risk is firm specific - diversification can reduce risk to low levels – with all risk
sources independent, exposure to any source of risk is reduced to negligible. Risk reduction
by spreading exposure across many independent risk sources.
Panel B – some risk is systematic – portfolio SD falls as no of securities increases and cannot
be at 0. Risk that remans after extensive diversification is market risk.
Market risk - Risk factors common to the whole economy; also
called systematic or no diversifiable risk.
Systematic risk - Risk factors common to the whole economy; also called market
risk or nondiversifiable risk.
Non diversifiable risk - Risk factors common to the whole economy; also
called market risk or systematic risk.
Unique risk - Nonmarket or firm-specific risk factors that can be eliminated by
diversification. Also called firm-specific risk, non-systematic risk, or diversifiable
risk.
Firm specific risk - Nonmarket or firm-specific risk factors that can be eliminated by
diversification. Also called unique risk, non-systematic risk, or diversifiable risk.
Non-systematic risk - Nonmarket or firm-specific risk factors that can be eliminated
by diversification. Also called unique risk, firm-specific risk, or diversifiable risk.
Systematic risk refers to risk factors common to the entire economy.
Diversifiable risk - Nonmarket or firm-specific risk factors that can be eliminated by
diversification. Also called unique risk, firm-specific risk, or non-systematic
risk. Nondiversifiable risk refers to systematic or market risk.
Insurance principle - The law of averages. The average outcome for many
independent trials of an experiment will approach the expected value of the
experiment.
7.2??????????? and 7.3????????
- Security selection
Diversification - Spreading a portfolio over many investments to avoid excessive
exposure to any one source of risk.
Panel A – All risk is firm specific - diversification can reduce risk to low levels – with all risk
sources independent, exposure to any source of risk is reduced to negligible. Risk reduction
by spreading exposure across many independent risk sources.
Panel B – some risk is systematic – portfolio SD falls as no of securities increases and cannot
be at 0. Risk that remans after extensive diversification is market risk.
Market risk - Risk factors common to the whole economy; also
called systematic or no diversifiable risk.
Systematic risk - Risk factors common to the whole economy; also called market
risk or nondiversifiable risk.
Non diversifiable risk - Risk factors common to the whole economy; also
called market risk or systematic risk.
Unique risk - Nonmarket or firm-specific risk factors that can be eliminated by
diversification. Also called firm-specific risk, non-systematic risk, or diversifiable
risk.
Firm specific risk - Nonmarket or firm-specific risk factors that can be eliminated by
diversification. Also called unique risk, non-systematic risk, or diversifiable risk.
Non-systematic risk - Nonmarket or firm-specific risk factors that can be eliminated
by diversification. Also called unique risk, firm-specific risk, or diversifiable risk.
Systematic risk refers to risk factors common to the entire economy.
Diversifiable risk - Nonmarket or firm-specific risk factors that can be eliminated by
diversification. Also called unique risk, firm-specific risk, or non-systematic
risk. Nondiversifiable risk refers to systematic or market risk.
Insurance principle - The law of averages. The average outcome for many
independent trials of an experiment will approach the expected value of the
experiment.
7.2??????????? and 7.3????????
- Security selection
