diversifiable risk

Diversifiable risk

Nonsystematic Risk

Risk that is unique to a certain asset or company. An example of nonsystematic risk is the possibility of poor earnings or a strike amongst a company's employees. One may mitigate nonsystematic risk by buying different of securities in the same industry and/or by buying in different industries. For example, a particular oil company has the diversifiable risk that it may drill little or no oil in a given year. An investor may mitigate this risk by investing in several different oil companies as well as in companies having nothing to do with oil. Nonsystematic risk is also called diversifiable risk. See also: Undiversifiable risk.

diversifiable risk

diversifiable risk

see CAPITAL-ASSET PRICING MODEL.
References in periodicals archive ?
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.