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Hi Mr Moffat
My apologies, i was completely taken away and just wrote a question in the comments section rather than the Ask the Tutor Forum,
Is the risk which we calculated using the standard deviation in the previous lectures, is it systematic risk based on the assumption of diversified portfolio? Or it is the total risk, also used in calculation of systematic & unsystematic risk (? total2 = ? systematic2 +
? unsystematic2)?
Sorry the above formula is not so clear.Thanks
Soud Said.The total risk is a combination of the systematic and unsystematic risks (althought we do not add the standard deviations, we add the variances which is the std devn squared)
However, we assume that shareholders have well diversified portfolios and therefore the unsystematic risk is not relevant, and it is the systematic risk that determines the return that shareholders require.
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