The non-diversifiable risk and ways to measure it
Explain in brief the non-diversifiable risk and ways to measure it?
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Unless the returns of one-half of the assets in the portfolio are exactly negatively correlated with the other half of the assets which is almost impossible because some risk will be there even after assets are combined into a portfolio. The risk degree that cannot be removed by diversifying from the portfolio's total risk is known as non-diversifiable risk. Non-diversifiable risk is calculated using a term called beta. The ultimate grouping of diversified assets, the market has a 1.0 beta. The individual assets and betas of portfolios have the returns related to those of the overall stock market. a) Portfolios having beta values with higher than 1.0 are comparatively more risky than the market. b) Portfolios with betas less than 1.0 are relatively less risky than the market. c) Risk-free portfolios have a beta of zero.
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