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

References in periodicals archive ?
Nondiversifiable Risk of Entrepreneurship, 100) Am.
(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.
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.
(107) "Systematic risk is also known as nondiversifiable risk." Id.
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.
and Levy, H., Total Risk, Diversifiable Risk and Nondiversifiable Risk: A Pedagogic Note, Journal of Financial and Quantitative Analysis (June 1980)
(1997) (discussing strategies to hedge nondiversifiable risk through
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.
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.
(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.
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.