This means that the milestone must be uncorrelated with the market and contain only so-called "diversifiable risk
." Otherwise, even a small, seemingly diversified holding would still be subject to some market risk.
: A risk that affects only some individual, business and small group.
Therefore, the financial experts advocate investors to prioritize the formation of effective portfolio so that the diversifiable risk
or systematic risk of securities can be adequately evaluated.
“Instead, a fiduciary must evaluate risk tolerance and investment goals; choose a commensurate level of overall portfolio market risk and expected return; and avoid wasteful, diversifiable risk
. Because of the multiplicity of relevant considerations … application of the prudent investor rules is specific to an investor’s circumstances.
Of the 37 IPSs reviewed, only four plans mentioned uncompensated risk, nonsystematic risk, or diversifiable risk
. Of the four plans that mentioned uncompensated risk in their IPSs, only one county discussed the reduction of uncompensated or nonsystematic risk in any depth.
Instead, a fiduciary must evaluate the principal's risk tolerance and investment goals, choose a commensurate level of overall portfolio market risk and expected return, and avoid wasteful diversifiable risk
The cost of insuring a diversifiable risk
is a simple calculation of the discounted value of expected (average) future damages.
As seen, the diversifiable risk
component [w.sub.i.sup.2] will become smaller as securities are added to tire portfolio.
Diversified shareholders "are indifferent to the levels of diversifiable risk
associated with different projects." (72) They "view projects with identical levels of market risk and identical levels of expected returns as equivalent, even if the projects have very different levels of diversifiable risk
." (73) For example, suppose that a corporation can choose between two potential projects.
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.
They are: (1) a future with a known distribution and diversifiable risk
known in advance, (2) a future with a known distribution and diversifiable risk
not known in advance, and (3) unknowable risks or true uncertainty.
and Levy, H., Total Risk, Diversifiable Risk
and Nondiversifiable Risk: A Pedagogic Note, Journal of Financial and Quantitative Analysis (June 1980)