Knowledge Tree
unsystematic risk
Also known as: firm-specific risk, diversifiable risk
Facts (16)
Sources
Topic 2: The Risk and Return Trade Off in Financial Decision Making oercollective.caul.edu.au 5 days ago 9 facts
claimDiversification reduces unsystematic risk in a portfolio by including assets with low or negative correlations, though systematic risk remains.
claimInvestors should not expect to be rewarded for taking on unsystematic risk because it can be reduced or eliminated through diversification.
claimThe Capital Asset Pricing Model (CAPM) assumes that investors are rational and risk-averse, markets are efficient, investors hold diversified portfolios to eliminate unsystematic risk, there are no taxes or transaction costs, and all investors have the same expectations about returns and risks.
claimPortfolio risk is determined by the variance and covariance of returns among assets, and diversification reduces unsystematic risk while systematic risk remains.
claimFor an investor holding only one asset, the relevant measure of risk is Total Risk, which comprises both Systematic Risk and Unsystematic Risk.
claimUnsystematic risk, also known as diversifiable risk, is specific to individual assets, companies, or industries and can be mitigated by holding a diversified portfolio; examples include company management decisions or industry-specific challenges.
claimInvestors should not expect to be rewarded for taking on unsystematic risk because this type of risk can be reduced or eliminated through diversification.
claimDiversifiable risk, also known as unsystematic risk, is risk specific to a particular company, industry, or asset, such as management decisions, product recalls, or competitive pressures, and can be reduced or eliminated through diversification.
claimFor an investor holding a diversified portfolio, the relevant measure of risk is only Systematic Risk, because Unsystematic Risk has been minimized through diversification.
The Risk-Return Tradeoff: Understanding Investment Goals for Long ... m1.com Aug 30, 2024 2 facts
claimDiversification is a risk management tool that involves spreading investments across various assets, sectors, geographic regions, and company sizes to potentially reduce unsystematic risk.
claimDiversification can potentially reduce unsystematic risk, which is the risk specific to individual companies or sectors, though it cannot eliminate all risk or guarantee a profit or protection against loss in declining markets.
Understanding The Risk And Return Tradeoff - FasterCapital fastercapital.com 2 facts
Chapter 8 – Risk and Return – Fundamentals of Finance pressbooks.pub 2 facts
claimThe Capital Asset Pricing Model (CAPM) assumes that all investors share identical expectations regarding future returns and risks, markets are efficient, and risk is adequately captured by beta while ignoring unsystematic risk.
claimSystematic risk (market risk) is defined as risk that impacts all industries, such as a major recession, whereas unsystematic risk (firm-specific risk) is specific to individual companies or sectors.
Risk-Return Tradeoff: Finance & Investments | Vaia vaia.com Sep 20, 2024 1 fact
procedureEffective management of the risk-return tradeoff involves diversifying an investment portfolio across various asset classes to mitigate unsystematic risk and aligning investment choices with personal risk tolerance and financial goals.