The CAPM decomposes a portfolio's risk into systematic risk and specific risk. What is the difference between systematic risk and specific risk?
A)Systematic risk is the risk of holding the market portfolio and specific risk is the risk which is unique to an individual asset.
B)Both risks correlate with movements in the market.
C)Systematic risk can be diversified away while specific risk cannot be.
D)There is no difference between them.

Question

Quizplus · Accepted Answer

Systematic risk is the risk of holding the market portfolio and specific risk is the risk unique to an individual asset. While systematic risk correlates with movements in the market, specific risk is uncorrelated with the market's movements.
Key Takeaway: Because systematic risk is a risk of an entire market, it cannot be diversified away, while specific risk can be. Diversification helps an investor reduce market risk simply by investing in many unrelated assets that do not have correlated specific risk.

The CAPM Decomposes a Portfolio's Risk into Systematic Risk and Specific