Non-diversifiable risk

Definition

Non-diversifiable risk, also known as systematic risk, is the inherent risk that affects the entire market or a broad range of assets. It cannot be eliminated through diversification.

5 Must Know Facts For Your Next Test

1. Non-diversifiable risk is influenced by macroeconomic factors such as inflation, interest rates, and economic recessions.
2. It impacts all investments to some degree and cannot be mitigated by holding a diversified portfolio.
3. Common examples include political instability, natural disasters, and significant regulatory changes.
4. Investors are typically compensated for assuming non-diversifiable risk through higher expected returns.
5. The Capital Asset Pricing Model (CAPM) quantifies non-diversifiable risk using the beta coefficient.

Review Questions

• What are the primary factors that contribute to non-diversifiable risk?
• Why can't non-diversifiable risk be mitigated through diversification?
• How does the Capital Asset Pricing Model (CAPM) relate to non-diversifiable risk?

Related terms

Diversifiable Risk: Also known as unsystematic risk, it is specific to a single asset or a small group of assets and can be reduced through diversification.

Beta Coefficient: A measure used in CAPM to quantify an asset's exposure to non-diversifiable risk relative to the overall market.

Systematic Risk: Another term for non-diversifiable risk, encompassing risks that affect an entire market or segment.