In broad terms, why is some risk diversifiable? Why is other
risk non-diversifiable? Differentiate between the two types of
risk. Does it follow that an investor can control the level of
unsystematic risk in a portfolio, but not the level of systematic
risk?
In Chapter 11 we discussed diversifiable vs. non-diversifiable
(i.e., "Systematic") risk.
A diversified portfolio reduces non-systematic (i.e.,
"diversifiable") risk.
But, what if I do not diversify, and therefore hold some portion
of diversifiable risk that I have not reduced through
diversification? I am taking more risk, and I need more return to
compensate me for the additional risk.
But, will the marketplace compensate me for the additional risk
I am taking? Will assets be priced such that I can comfortably...
Explain the differences between total risk, unsystematic risk,
and systematic risk. Identify which risk is measured by standard
deviation and which is measured by beta.
Q9: What is the difference between un-systematic and
systematic risk? Show graph! Give Examples.
Unsystematic Risk: Systematic Risk:
Graph:
--What type of risk can be diversified away? How would
you do this? What statistical measures would you have to look at?
Explain!
Types of Risk
Explain the differences between total risk, unsystematic risk,
and systematic risk. Identify which risk is measured by standard
deviation and which is measured by beta. Please explain
indepth.
Explain the difference between systematic risk and unsystematic
risk. If you had a portfolio with five stocks and wanted to reduce
the systematic risk, would you be able to do so by adding ten more
stocks? Explain.
a) Explain the difference between systematic risk and
unsystematic risk.
b) What are some examples of each?
c) Assume you are considering an investment in a new medical
company that has developed a tiny robot that enters the body and
(hopefully) destroys cancer tumors. If it works in clinical trials,
the company will have cured cancer (and be very valuable); if it
fails in clinical trials, the robot will be killing patients (and
the company will be worthless). Under the...