“Investors can construct portfolios that eliminate asset specific risk.” What does that mean? Does CAPM assume the same thing?
oh does it just mean that you can eliminate unsystematic risk? does asset risk mean unsystematic risk
i think this is part of the assumption for APT model…
I think, that means investors hold a portfolio thats exposed ONLY to systematic risk (or you can say that the unsystematic risk is not priced in the portfolio)
Right. When you hold a diversified portfolio, the only risk the portfolio is exposed to is systematic (market) risk, all of the idiosyncratic (stock-specific) risk has been diversified away. (Theoretically anyway)
I took “asset-specific risk” as similar thing as firm-specific risk — unsystematic risk.