specific risk and systemic risk

Discussion in 'CT8' started by uktous, Jul 30, 2009.

  1. uktous

    uktous Member

    hi,

    I know that total risk = specific risk + systemic risk.
    In CAMP, the expected return on a portfolio is
    E(Rp) = Rf + Bp(E(Rm) - Rf)

    The above equation doesn't allow for any compensation for specific risk.

    I have 3 questions.

    Question1
    I know that Bp(E(Rm) - Rf) is the compensation for systemic risk but I don't understand.
    Can you tell me why that is the compensation for systemic risk?

    Question2
    In CT8, which equation will allow for the compensation for specific risk?
    Which part is the compensation for specific risk?

    Question3
    In CT8, which equation will measure both specific risk and systemic risk?
     
    uktous, Jul 30, 2009
    #1
  2. capitalH

    capitalH Member

    Remember the principle:

    Markets do not reward specific risk.

    Why?

    You cannot diversify away specific risk. If you do not diversify away specific risk, the big players will, causing that the price will only reflect systemic risk.

    Hence no formula for specific risk
     
    capitalH, Jul 30, 2009
    #2

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