For a given project, an investor must be compensated for non-diversifiable risk
characterized by the correlation between the return on the project and the return on the overall market portfolio.
Systemic risk typically comes from non-diversifiable risk
sources such as changing market rate adequacy, unknown prospective frequency and severity trends, weather-related losses, legal reforms and court decisions, the level of economic activity and other macroeconomic factors.
they reveal that, compared to a sample of unaffected firms, non-diversifiable risk
decreases for affected firms.
pt] is the variability in return consisting of diversifiable risk and non-diversifiable risk
From a finance perspective, the distinction between pure and speculative risk blurs because the rate of return shareholders require depends on its non-diversifiable risk
(systematic risk) or core risk, which can include pure and speculative risk components, investors do not accept a lower rate of return for the stock of a firm that does, through a risk management program, what the shareholders can do for themselves at lower cost through portfolio diversification.
Significant use of debt financing may result in a substantial increase in the firm's bankruptcy risk and an increase in the non-diversifiable risk
of bankruptcy to managers themselves.
3) One result of the Markowitz-Miller-Sharpe contributions was the Capital Asset Pricing Model (CAPM), which measures the required return to assets and securities by a risk-free rate plus a risk premium calculated by the product of the market price of risk times a measure of the non-diversifiable risk
of the returns to the individual asset or security.
Cooper says of CCAPMs, the models used to determine the theoretical appropriate required rate of return based off of non-diversifiable risk
, "They leave a lot to be desired.
Aon Re Global's Insurance Risk Study examines risk from non-diversifiable risk
sources, including changing market rate adequacy, unexpected frequency and severity trends, weather-related losses, legal reforms and court decisions, the level of economic activity and other macroeconomic factors, offering insight on risk from reserve development.
The APT shares the CAPM's principal feature: only non-diversifiable risk
is priced, but it deviates from the CAPM by allowing for multiple causes of such risks.
When it comes to non-diversifiable risk
, the biotech industry is riskier than most, but not by much.
Aon Re's Insurance Risk Study quantifies the systemic risk for each line of business, representing the risk to a large portfolio from non-diversifiable risk
sources such as: