Systematic risk vs. non-systematic risk

CFA Level I Corporate Finance
#1

Hello All,

In using the single-index model/ market model, why is it that we only calculate the systematic risk of the portfolio, which may not be diversified? Why not calculate non-systematic risk? Just curious.

Moreover, what if the systematic risk for securities is much lower than unsystematic risk? (Can I say if B < 1, systematic risk is lower?)

I would appreciate if someone could share thoughts.

thanks

#2

Any help please ? Thanks in advance…

#3

If your portfolio is the entire market, then all of your risk is systematic risk, by definition.

And if all of your risk is systematic, then there is zero non-systematic risk, by definition. And if you have zero systematic risk, then systematic risk will be greater than nonsystematic–again, by definition.

#4

Thanks Greenman72 for your answer. However, I don’t think my question is answered yet. I well aware of the mathematics behind the statements. But, my question is more about the CAPM. I think I didn’t phrase it properly in my earlier post. CAPM is derived from single-index model/marke model for portfolio. The CAPM assumes that investors hold fully diversified portfolios. This means that investors are assumed by the CAPM to want a return on an investment based on its systematic risk alone, rather than on its total risk.

Why is this assumed? As an investor and being in mid-twenties, I would probably invest heavily in equities rather than market-based funds such as ETFs. Why is the CAPM assuming that investors hold fully diversified portfolios? Can you please explain?

Thanks in advance.

#5

The assumption is that a person would not want to expose themself to non-systematic risk, because it can easily be diversified away.

Basically, nonsystematic risk is a risk that IS avoidable, and you’re NOT compensated for taking it. Systematic risk is NOT avoidable, and you ARE compensated for taking it.