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    Unique Risk (Firm-specific risk) vs Market Risk (Systematic risk)

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    In financial theory, the total risk (stand alone risk) is composed of the unique risk and the market risk. The total risk is usually measured as the standard deviation whereas the market risk is measured as the beta associated with the market portfolio. Please see the following two different stocks.

    Ford return GM return
    Standard Deviation 38.1% 28.3%
    Beta 1.05 1.42

    a.) Which stock has more market risk?
    b.) When held in insolation, which stock has more total risk (stand alone risk)?
    c.) Which stock has more unique risk?

    In class, we have not really gone over this type of problem and I am having trouble getting started. The text book is not much help either.

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    Solution Preview

    a) Market related risk is measured by Beta. Since beta for GM is higher, it has higher market related ...

    Solution Summary

    In financial theory, the total risk (stand alone risk) is composed of the unique risk and the market risk. The total risk is usually measured as the standard deviation whereas the market risk is measured as the beta associated with the market portfolio. Please see the following two different stocks.

    $2.19

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