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The concepts of systematic and unsystematic risk in finance, with a focus on the Security Market Line and the Beta Coefficient. It discusses how these concepts are used to measure and compare the risk and expected return of different investments. The document also touches upon the Capital Asset Pricing Model (CAPM) and the sources of beta estimates.
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Systematic risk Risk that influences a large number of assets. Also called market risk. Unsystematic risk Risk that influences a single company or a small group of companies. Also called unique or asset-specific risk.
Total risk = Systematic risk + Unsystematic risk
Beta coefficient ( β ) Measure of the relative systematic risk of an asset. Assets with betas larger than 1. have more systematic risk than average, and vice versa.
20 % 8 % β
= − =
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ERA Rf
Capital asset pricing model (CAPM) A theory of risk and return for securities on a competitive capital market.
c how closely correlated the security’s return is with the overall market’s return, and d how volatile the security is relative to the market.
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i i Ri^ RM σ
σ β =Corr , ×