For the firms with access to the global stock market, the use of the Sharpe-Lintner-Mossin CAPM that presumes market segmentation (Bekaert & Harvey, 1995) will tend to overestimate the cost of equity, since diversifiable risks
in a local market investment could now be diversified internationally (Stulz, 1999).
1986: Diversifiable risks
in LDC lending: A 20/20 hindsight view.
Fama and French argue that high average returns on small cap stocks and high book to market ratio stocks reflect unidentified state variables that produce non diversifiable risks
in returns and that are not captured by the market return and are priced separately from market beta.
Even worse, although covariant risks are difficult for any community to manage efficiently, research has also shown the informal risk-sharing mechanisms used by the poor are inefficient even for idiosyncratic, diversifiable risks
By shielding directors from liability, the business judgment rule enables directors to ignore the diversifiable risks associated with various investment options and focus on expected value, which increases shareholder wealth.
Diversified shareholders "are indifferent to the levels of diversifiable risk associated with different projects.
For specific investment asset in a particular country, at least part of the political risks resulting from political violence-related policy changes are not diversifiable risks
The diversifiable risks
tend to be those more closely related to specific companies or securities, such as management risk and default risk.
Insurance is designed to build portfolios of diversifiable risks
and to hedge the systematic risk in these portfolios.
are those risks that may be protected against by using the law of large numbers.
Asset allocation permits increased returns, while reducing diversifiable risks
Understanding the meaning of diversifiable and nondiversifiable risks may encourage the use of asset allocation (see Chapter 6) and other portfolio techniques to minimize diversifiable risk
in funds used for retirement income.