nondiversifiable risk


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Nondiversifiable risk

Risk that cannot be eliminated by having a large portfolio of many assets.

Systemic Risk

A risk that is carried by an entire class of assets and/or liabilities. Systemic risk may apply to a certain country or industry, or to the entire global economy. It is impossible to reduce systemic risk for the global economy (complete global shutdown is always theoretically possible), but one may mitigate other forms of systemic risk by buying different kinds of securities and/or by buying in different industries. For example, oil companies have the systemic risk that they will drill up all the oil in the world; an investor may mitigate this risk by investing in both oil companies and companies having nothing to do with oil. Systemic risk is also called systematic risk or undiversifiable risk.

nondiversifiable risk

References in periodicals archive ?
Ultimately, Easley and O'Hara show that information risk introduces a new type of systematic risk, requiring investors to be compensated for this nondiversifiable risk.
And nondiversifiable risk is different from insurable risks; it commands a risk premium determined by societal risk aversion.
107) "Systematic risk is also known as nondiversifiable risk.
In contrast, Wang (2003) and WBF (2009) show that, in a world with risk-averse investors, each reference rate should take account of the nondiversifiable risk of the associated financial instrument.
1997) (discussing strategies to hedge nondiversifiable risk through
They demonstrate useful equivalences between decision tree analysis and real option valuation when nondiversifiable risk isn't great enough that it would change the investment decision; modeling risks explicitly in the cash flow projections and adding a country risk premium in the discount rate; and three ways to compute equity cash flows for the valuation of financial companies.
If the bank is not risk-neutral, it will differentiate between risk that may be eliminated in a large portfolio and nondiversifiable risk.
Business recessions, as a major source of nondiversifiable risk, impose high costs on society.
iM] represents asset i's exposure to nondiversifiable risk M, [R.
One would like to understand the real, macroeconomic, aggregate, nondiversifiable risk that is proxied by the returns of the HML and SMB portfolios.
Our research shows that the bulk of the systematic or nondiversifiable risk of any portfolio can be "explained" by the economic cycle.