Investors should expect to be compensated for bearing risk, but they should not expect to be compensated for bearing risk.

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16-08-2022
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Investors should expect to be compensated for bearing risk, but they should not expect to be compensated for bearing risk.

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tutorconsortium201 tutorconsortium201 · Answer 1 · 2022-08-21T07:41:05+02:00

Investors should expect to be compensated for bearing systematic risk, but they should not expect to be compensated for bearing unsystematic risk.

Can unsystematic risk be completely eliminated?

This risk is also known as a diversifiable risk since it can be eliminated by sufficiently diversifying a portfolio.
There isn't a formula for calculating unsystematic risk; instead, it must be extrapolated by subtracting the systematic risk from the total risk.

What eliminates unsystematic risk?

The best way to reduce unsystematic risk is to diversify broadly.
For example, an investor could invest in securities originating from a number of different industries, as well as by investing in government securities.

What happens to unsystematic risk in a large portfolio?

Unsystematic risks in your portfolio are naturally higher with the fewer investments you have in your portfolio.
As the number of holdings rise, the volatility of return (i.e., risks) falls. Mathematically, the average volatility of a single stock portfolio is more than double that of a diversified portfolio.

Learn more about systematic risk

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Investors should expect to be compensated for bearing ____ risk, but they should not expect to be compensated for bearing ____ risk.

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Investors should expect to be compensated for bearing risk, but they should not expect to be compensated for bearing risk.