nondiversifiable risk

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

See systematic risk.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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Nondiversifiable Risk of Entrepreneurship, 100) Am.

LIMITED LIABILITY AND THE KNOWN UNKNOWN

(c) The capital asset pricing model (Sharpe, 1964) assets that a higher level of systematic or nondiversifiable risk results in a higher expected rate of return.

The valuation implications of enterprise risk management maturity

Thus, catastrophic climate risk is a nondiversifiable risk. And nondiversifiable risk is different from insurable risks; it commands a risk premium determined by societal risk aversion.

What is the right price for carbon emissions? The unknown potential for devastating effects from climate change complicates pricing

(107) "Systematic risk is also known as nondiversifiable risk." Id.

(Systemic) risk and taxation

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.

The value of risk: measuring the service output of U.S. commercial banks

and Levy, H., Total Risk, Diversifiable Risk and Nondiversifiable Risk: A Pedagogic Note, Journal of Financial and Quantitative Analysis (June 1980)

Market and financial performance as related to idiosyncratic risk and the effect of outlier screening in market studies

(1997) (discussing strategies to hedge nondiversifiable risk through

The evolution of debt: covenants, the credit market, and corporate governance

The risk-free rate would be an appropriate discount rate only if the adjustment that reflects the systematic risk (nondiversifiable risk) is reflected in the expected cash flows.

New requirements for measuring and reporting fair value in GAAP

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.

Effective valuation

(20) Since the price of a security is determined by a firm's expected returns, as well as the degree of nondiversifiable risk that accompanies those expected returns, (21) the firm's IPO prospectus must convey this information to the investors.

IPO liability and entrepreneurial response

Beaver (1997), Feltham and Ohlson (1999), and others characterize equity value as a function that increases in expected future profitability and decreases in nondiversifiable risk, all else equal.

Fair values, income measurement, and bank analysts' risk and valuation judgments

The standard CAPM method says the required return on a risky asset such as common stock is related linearly to a nondiversifiable risk, otherwise known as "systematic" risk.

Calculating a firm's cost of capital: three different methods of determining the weighted average cost of capital for Microsoft and general electric produce different results for each firm. Thus, careful judgment and sensitivity analysis are important components for developing reliable cost of capital estimates