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Understanding Risk: Systemic versus Idiosyncratic

Reference: DARDEN-F-1973-E
Number of pages: 8
Publication Date: Jan 21, 2021
Fecha de edición: May 12, 2021
Source: Darden University of Virginia (USA)
Type of Document: Technical Note

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Description

Using the fictional situation of two brothers facing the challenge of managing a commodity business in central Africa, this note explores different metrics for risk and related considerations for investors. The note considers measures of volatility, including the difference between systematic risk and idiosyncratic risk, and how diversification reduces idiosyncratic risk. The note uses these concepts to motivate the foundations of portfolio risk assessment by rational investors and the theory of the capital asset pricing model.

Keywords

capital asset pricing model CAPM Diversification idiosyncratic risk portfolio theory Systematic risk Volatility