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In earlier article on CAPM, we noted the term systematic risk and beta. This article elaborates further on these terms.

Looking at the following relation of risk:

Total risk = systematic + unsystematic risk

Systematic risk is market related risk or non-diversifiable risk which is due to economy wide factors.

As for unsystematic risk which is also called diversifiable risk is that component of total risk that is unique to the firm and may be eliminated by diversification. The unsystematic risk can be removed by holding a wide range of well diversified portfolio where the returns on such well diversified portfolio will vary due to the effects of market-wide or economy wide factors.

Systematic risk of a security or portfolio will depend on its sensitivity to the effects of these market wide factors.

For Beta, it is a measure of a security’s systematic risk, describingthe amount of risk contributedby the security to the market portfolio.

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