In: Finance
The risk is the degree of uncertainty to which a portfolio is exposed. Total risk of a portfolio consists of -
Systematic risk is the probability of occurrence of loss existing in the stock market. It is inherent risk but it can be controlled.
Unsystematic risk is an industry specific or firm specific risk. It is also called Specific risk/ residual risk. It is possible to eliminate unsystematic risk through diversification of portfolio
In CAPM the relationship between systematic risk and expected return for portfolio is described. So in CAPM the relevant risk variable is systematic risk. This risk is relevant because it can not be eliminated but controlled (as stated above). The unsystematic risk on the other hand is not relevant because of the possibility of elimination it carries.
For further clarification
CAPM formula uses Beta factor to find out expected return. Beta factor is a measure of systematic risk arising from exposure to general market movements