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systematic risk

Explain why systematic risk is more closely linked to returns than is unsystematic risk. Which differences are most important to keep in mind when working with each type of risk? How does diversification reduce volatility?

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First, let me define systematic risk and unsystematic risk (and you can note the differences between the two risks).

Systematic risk is the risk associated with the entire market, and it cannot be reduced through diversification.

Unsystematic risk is the risk associated with specific firms/industries, and it can be reduced through diversification.

The reason that ...

Solution Summary

Explain why systematic risk is more closely linked to returns than is unsystematic risk.

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