Lesson plan
specific risk
In finance, a specific risk is a risk that affects a very small number of assets. This is sometimes referred to as "unsystematic risk". In a balanced portfolio of assets there would be a spread between general market risk and risks specific to individual components of that portfolio. Determination of the extent of exposure to individual risks is made using models such as Treynor-Black in which the optimal share of a security is inversely proportional to the square of its specific risk. An example would be news that is specific to either one company or a group of companies, such as the loss of a patent or a major natural disaster affecting the company's operation. Unlike systematic risk or global risk of international markets, specific risk can be diversified away. In fact, most unsystematic risk is removed by holding a portfolio of about twenty-five to thirty securities.
Article summary
In finance, a specific risk is a risk that affects a very small number of assets. This is sometimes referred to as "unsystematic risk". In a balanced portfolio of assets there would be a spread between general market risk and risks specific to individual components of that portfolio. Determination of the extent of exposure to individual risks is made using models such as Treynor-Black in which the optimal share of a security is inversely proportional to the square of its specific risk. An example would be news that is specific to either one company or a group of companies, such as the loss of a patent or a major natural disaster affecting the company's operation. Unlike systematic risk or global risk of international markets, specific risk can be diversified away. In fact, most unsystematic risk is removed by holding a portfolio of about twenty-five to thirty securities.
Key claims
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Discussion questions
- Summarise the article in your own words. Which single claim would you verify first, and why?
- Which claim in this article is most likely to be revised as the sources update? How would you check its current status?
- If two sources disagreed about one of these facts, what would you need in order to trust one over the other?
Bibliography
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Key claims and bibliography are generated from the same tracked claims and sources as the article page.