The cost of insuring a diversifiable risk
is a simple calculation of the discounted value of expected (average) future damages.
They argue that the high correlations are indicative of a lack of diversifiable risk
in the domestic market thus magnifying the international diversification benefits of financial integration.
2009) propose to compensate a mortality risk taker according to an "instantaneous Sharpe ratio," which is defined as the additional return in excess of the risk-free rate divided by the standard deviation of a mortality portfolio after all diversifiable risk
is hedged away.
Rhodes-Kropf, 2003, "The Price of Diversifiable Risk
in Venture Capital and Private Equity," Working Paper, Columbia University Graduate School of Business.
The assumption is that the portfolio manager has diversified away the diversifiable risk
(unsystematic risk/company specific risk) and the matter of concern for the investor should be the systematic risk (non-diversifiable/market risk) only, instead of total risk.
Camp and Enigk use (1-R2) (the percentage of total variation in fund return which is not explained by benchmark index return variation) as the measure of the level of retention of diversifiable risk
Firms with high levels of diversifiable risk
choose convertible debt over straight debt to reduce agency costs due to bondholder/stockholder conflicts of interest.
pt] is the variability in return consisting of diversifiable risk
and non-diversifiable risk
3) That part of the risk of a stock that can be eliminated is called diversifiable risk
, while that part that cannot be eliminated is termed market risk, or undiversifiable risk.
Consequently, risk aversion may cause managers to deviate from acting purely in the best interest of shareholders, expending resources to hedge diversifiable risk
Fisher and Lorie (1970) evaluated the return distributions for the year between 1926-1965 and concluded that holding an eight stock portfolio can reduce the diversifiable risk
by approximately 80% than holding a single stock.
Shareholder wealth would be reduced if directors were sensitive to diversifiable risk
and were therefore deterred from undertaking high risk projects that diversified shareholders would find desirable.