1497 Words6 Pages

CAPM and Sources for Capital
Market Risks
A diversifiable risk can be taken to be a price change risk as a result of circumstances that are largely unique in regard to a given security in contrast to the entire market (Focardi & Fabozzi, 2004). On the other hand, an un-diversifiable risk can be taken to be a risk which affects a given asset class or liabilities in their entirety.
A substantial unexpected increase in inflation is taken to be an un-diversifiable risk. This is because an increase in inflation is bound to affect the entire class of assets as well as the overall market as opposed to only a single security.
A major recession in the United States is another example of an un-diversifiable risk. In this regard, a major recession would affect the entire market as opposed to a single counter of securities or assets. One of the ways to protect against his kind of risk would be through asset allocation.
When it comes to a major lawsuit filed against one large publicly traded corporation, this represents a diversifiable risk. Such a development would affect only the securities of that specific publicly traded corporation as opposed to the entire market. The entire economy will not be affected by the filing of the lawsuit against the large publicly traded corporation. In contrast, some corporations not affected by lawsuit will benefit as they will meet the demand not being met by corporation affected by the lawsuit.
Expected Rate of Return
According to (Magni,

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