CHAPTER 5& 6

Required Rate of return = Minimum accepted return to

make investor willing to make an investment
Two Types of risks are assumed
1. Systematic Risk

Hits whole market

Cannot be controlled or diversified
Market Risk
Ex Inflation risk
1. Non Systematic Risk

Firms specific risk

Can be diversified using portfolio diversification
between sectors ,industries &geographical locations
Diversification can minimize or eliminate Non
Systematic risk
The risk of portfolio depends on the risk of individual
stocks included ,Correlation among them and the
weight of stocks
Increasing number of stocks reduces risk to a certain
limit after which systematic risk is fixed and cannot be
reduced by adding more and more stocks

Page1

Globalization means that risks affect markets

internationally accordingly globalization results in the
fact that non systematic risk may not be eliminated

Page1