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  • Chapter Title: Return, Risk, and The Security Market Line

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    Thao Le
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    1. Systematic risk, also called market risk, cannot be eliminated by diversification and affects the entire market. Unsystematic risk only impacts individual assets and can be reduced through diversification. 2. Diversification works by combining different assets whose returns are not perfectly correlated, so that the risks of some assets are offset by the non-correlated returns of others. This reduces the total risk of the portfolio. 3. Systematic risk cannot be diversified away as it stems from macroeconomic or market-wide factors that influence all assets. A fully diversified portfolio still carries systematic risk equal to the market portfolio.

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    13 Handout 1

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    1. Systematic risk, also called market risk, cannot be eliminated by diversification and affects the entire market. Unsystematic risk only impacts individual assets and can be reduced through diversification. 2. Diversification works by combining different assets whose returns are not perfectly correlated, so that the risks of some assets are offset by the non-correlated returns of others. This reduces the total risk of the portfolio. 3. Systematic risk cannot be diversified away as it stems from macroeconomic or market-wide factors that influence all assets. A fully diversified portfolio still carries systematic risk equal to the market portfolio.

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    8 views4 pages

    Chapter Title: Return, Risk, and The Security Market Line

    Uploaded by

    Thao Le
    1. Systematic risk, also called market risk, cannot be eliminated by diversification and affects the entire market. Unsystematic risk only impacts individual assets and can be reduced through diversification. 2. Diversification works by combining different assets whose returns are not perfectly correlated, so that the risks of some assets are offset by the non-correlated returns of others. This reduces the total risk of the portfolio. 3. Systematic risk cannot be diversified away as it stems from macroeconomic or market-wide factors that influence all assets. A fully diversified portfolio still carries systematic risk equal to the market portfolio.

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    © All Rights Reserved
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    Chapter Title: Return, Risk, and the Security Market Line

    Word Bank

    Word Definition/Example

    Chapter Work Completed


    Handout
    Word Bank & Summaries
    Book Exercises
    Khan Academy
    Plickers
    Video Introduction (up to 1.47)

    What is Stock Beta - Stock Market Beta - What is Investment Beta - YouTube

    What does the author of the video say beta is?

    What percent of the movements of the market will be reflected in a stock with a beta of 1?

    Why did stock 2 grow by less than the market?


    13.4 Risk: Systematic and Unsystematic Risk & 13.5 Diversification and Portfolio Risk

    In this section we are introduced to the two different types or risk and ways to eliminate one of those
    risks.

    (Systematic and Unsystematic Risk)

    1. Systematic risk is also called market risk. Why is that? Support your answer with an example.

    2. What type of risk affects only one asset or one industry? Provide an example of this type of risk.

    (The principle of diversification)

    3. What is a portfolio of assets and what are portfolio weights? ***Top of page 425 will help***

    4. What is diversification? Bottom of page 432 will help.

    5. What is the principle of diversification?

    In this section of the book when you see ‘standard deviation’ mentioned it is just being used to show
    how risky an asset is.
    6. The author notes that unsystematic risk (diversifiable risk) is essentially eliminated by having a
    portfolio of diversified assets. How is this possible? Top of page 434 will help.

    7. What does the author say about systematic risk and diversification? Bottom of page 434 will
    help.

    Explain what you see in ‘Figure 13.1’. Bottom of page 432 and top of page 433 will help.

    Explain what you see in equation 13.6 at the end of page 434.

    Most Important Points to Remember

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