What is equation for total risk? What is systematic and nosystematic risk? Which one can be diversidifed away?
Non systematic risk can be diversified away.
Equation is Total risk = non systematic+systematic risk
- Non systematic can be diviersified aways
- systemati can't
You do not expect to get paid for risk that can be diviersified away. IF a biotech stock price is primarily dependant on whether a specific drug gets passed by the FDA, the price may not change much if markets are good or bad. Therefore, altho the unsystematic risk is high, and risk is high, the unsystematic risk is lower than a stock that may be more dependant on the market ( say an established producer of amchine tools) which isn't a risky investment but sensitive to market factors (GDP, etc.