What is nondiversifiable risk? how is it measured, Financial Management

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What is nondiversifiable risk? How is it measured?

But for the returns of one-half the assets in a portfolio are flawlessly negatively correlated with the other half-which is extremely unlikely-some risk will stay after assets are combined into a portfolio. The extent of risk that residue is nondiversifiable risk, the part of a portfolio's overall risk that cannot be eliminated by diversifying.

Nondiversifiable risk is calculated by a term called as beta (b). The eventual group of diversified assets the market has a beta of 1.0.  The betas of portfolios and individual assets relate their revenues to those of the overall stock market.  The Portfolios between betas higher than 1.0 are comparatively more risky than the market, the Portfolios with betas less than 1.0 are comparatively less risky than the market and Risk-free portfolios have a beta of zero.

 


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