Question

Does the market portfolio in a CAPM world have unsystematic risk? Does the investment portfolio of...

Does the market portfolio in a CAPM world have unsystematic risk? Does the investment portfolio of any individual investor in a CAPM world have unsystematic risk?
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Unsystematic risk is the risk inherent to a particular asset whereas systematic risk is the risk that affects all the assets in the market.

The market portfolio does not have unsystematic risk, it only has systematic risk. This is because, under CAPM, the market portfolio is defined as the value weighted portfolio of all the assets in the market thus it is completely diversified and thus all unsystematic (diversifiable) risk has been removed.

On the other hand, the investment portfolio of any individual investor will have at least some level of unsystematic risk. This is because, unless the investor replicates the market portfolio , the diversification of the portfolio will not be ideal and thus some level of diversifiable risk will still be there in the portfolio.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What is unsystematic risk? What portfolio minimises unsystematic risk and why?
What is unsystematic risk? What portfolio minimises unsystematic risk and why?
1. Which term has a different meaning than the others? Diversifiable risk Unsystematic risk Market risk...
1. Which term has a different meaning than the others? Diversifiable risk Unsystematic risk Market risk Nonsystematic risk Firm-specific risk 2. Systematic risk is also called _____. Check all that apply: market risk non-diversifiable risk common risk fundamental risk 3. Nonsystematic risk is also called _____. Check all that apply: random risk unsystematic risk firm-specific risk diversifiable risk 4. Diversification is _____. It _____. the mixing of different assets within a portfolio; reduces overall portfolio risk buying more than three...
Which of the following statements are FALSE? The CAPM identifies the market portfolio as the efficient...
Which of the following statements are FALSE? The CAPM identifies the market portfolio as the efficient portfolio. If some security were not part of the efficient portfolio, then every investor would want to own it, and demand for this security would increase causing its expected return to fall until it is no longer an attractive investment. If investors have homogeneous expectations, then each investor will identify the same portfolio as having the highest Sharpe ratio in the economy. The market...
According to Markowitz portfolio theory a. a portfolio with the minimum risk for its level of...
According to Markowitz portfolio theory a. a portfolio with the minimum risk for its level of expected return lies on the efficient frontier b. combing any two risky assets in portfolio will reduce unsystematic risk compared to a portfolio holding one of two risky assets c. The investor who invest in both bonds and stocks should have more risk than the investor who invest in bonds only d. adding a risky stock to a (less risky) bond portfolio can reduce...
Portfolio diversification eliminates Select one: a. systematic risk b. the market risk premium. c. All of...
Portfolio diversification eliminates Select one: a. systematic risk b. the market risk premium. c. All of these statements are true. d. unsystematic risk e. all investment risk.
Share Market & Risk and Return a) What is the purpose of CAPM? b) What are...
Share Market & Risk and Return a) What is the purpose of CAPM? b) What are the assumptions of CAPM and are they reasonable? c) How does portfolio diversification relates to the CAPM? d) How do we proxy for systematic risk? e) What is the outcome of CAPM?
In a world where the assumptions of CAPM applied which of the following statements would be...
In a world where the assumptions of CAPM applied which of the following statements would be correct? I. All investors will hold the market portfolio, which includes all the risky assets in the world. II. Investors' complete portfolio will vary depending on their risk aversion. III. The return per unit of risk will be identical for all individual assets. IV. The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio. Group of answer...
Does weather create systematic or unsystematic risk for investors? If you answered that weather creates systematic...
Does weather create systematic or unsystematic risk for investors? If you answered that weather creates systematic risk, explain why you would not be able to diversify away weather-related risk in a portfolio. If you answered that weather creates unsystematic (company-specific) risk, explain how you would eliminate weather-related risk in a portfolio.
Increasing the number of stocks in a portfolio would likely __________________. decrease the unsystematic risk of...
Increasing the number of stocks in a portfolio would likely __________________. decrease the unsystematic risk of the portfolio decrease the systematic risk of the portfolio increase the undiversifiable risk of the portfolio increase the diversifiable risk of the portfolio Group of answer choices I and IV only II only I only II and III only
What is the CAPM required return of a portfolio with 40% invested in the market portfolio,...
What is the CAPM required return of a portfolio with 40% invested in the market portfolio, 18% invested in risk-free assets, and the rest invested in a stock with a beta of 2.3? The risk free rate is 0.8% and the expected market risk premium is 5.8%. Answer in percent, rounded to two decimal places.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT