Shares have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.

Question

Quizplus · Accepted Answer

Shares have both diversifiable risk (company-specific risk) and undiversifiable risk (market risk), but only undiversifiable risk is rewarded with higher expected returns. Diversifiable risk can be eliminated through diversification, so investors do not demand higher returns for taking on this type of risk.

Shares Have Both Diversifiable Risk and Undiversifiable Risk, but Only