FIN - Chapter 11

Unsystematic Risk

Also known as: "Specific Risk" / "diversifiable risk" / "residual risk"

Systematic Risk

Consists of the day-to-day fluctuations in a stock's price

- If you hold just ( 1 ) investment and it performs badly, you could lose all of your money - If you hold a diversified portfolio with a variety of different investments, it is much less likely that ALL of your investments will perform badly at the same time

Explain how diversification changes the total risk of a portfolio?

*UN*-diversifiable risk

Systematic Risk is also known as "market risk" / "*(*undiversifiable / diversifiable*)*" risk

Unsystematic Risk

The type of uncertainty that comes with the company or industry you invest in

Systematic Risk

The uncertainty inherent to the entire market or entire market segment

Diversification

Unsystematic Risk can be reduced through __________

Systematic Risk deserves a risk premium

Which type(s) of risk deserves a *risk premium*?

Unsystematic Risk is diversifiable

Which type(s) of risk is/are *diversifiable*? - Unsystematic risk - Systematic risk