Of the 37 IPSs reviewed, only four plans mentioned uncompensated risk, nonsystematic risk, or diversifiable risk
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.
Rhodes-Kropf, 2002, "The Price of Diversifiable Risk
in Venture Capital and Private Equity", Working Paper, Columbia University.
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.
Diversified shareholders "are indifferent to the levels of diversifiable risk
associated with different 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.
Total Risk, Diversifiable Risk
and Nondiversifiable Risk: A Pedagogic Note, Journal of Financial and Quantitative Analysis (June 1980)
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.
This Article has shown that the Securities Act's standard of strict liability for IPO disclosure has the effect of inefficiently allocating diversifiable risk
to entrepreneurs, resulting in distortions of entrepreneurs' behavior.