Can someone please explain why alpha is related to unsystematic/nonsystematic risk?
If a security plots on the SML – pure, unadulterated, systematic risk – its alpha is zero.
If it plots off the SML, its alpha is not zero.
it’s not something that can be explained. it’s just that by definition.
i.e. systematic risk is a synonym for beta. nothing more.
(formally beta is a portfolio component, and systematic risk a market component, but I didnt see cfai touch that topic)
It isn’t. Alpha is the excess return you realize above the return explained by the total risk components, which is both systematic, and idiosyncratic risk.