6

Risk III: Systematic risk

By now we know that when assessing the risk of a portfolio there is more to it than the volatility of each individual asset. In this chapter we’ll explore why this is the case, and while we’re at it, we’ll end up refining the way we assess risk. We’ll also explore the role of correlations in portfolios and briefly discuss the benefits of international diversification.

Total risk and systematic risk

When we started our discussion of risk in Chapter 3 we stressed that unlike the concept of return, which is straightforward, the concept of risk is slippery. ...

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