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

Question

Quizplus · Accepted Answer

Diversifiable risk, also known as company-specific risk, can be eliminated through diversification, while undiversifiable risk, also known as market risk, cannot. Therefore, investors are only rewarded for taking on undiversifiable risk, which is reflected in higher expected returns.

Shares Have Both Diversifiable Risk and Undiversifiable Risk, but Only