Question
Market vs. Firm-Specific Risks : One of the benefits of the market model is that it allows us to decompose total risk (variance) into two
- Market vs. Firm-Specific Risks: One of the benefits of the market model is that it allows us to decompose total risk (variance) into two components. Using the equation we discussed in class, calculate the market component of risk and the firm-specific component of risk for each of the securities. Fill in the related table below.
Decomposition of Risk
Total Risk
Market Risk
Firm-Specific Risk
Market portfolio
Home Stock ( BA ) 0.0053 1.4417 -1.4363
Away Stock ( C ) 0.2076 5.5242 -5.5034
Which of the three securities is the riskiest based on total risk?
Which has the most systematic risk?
Which has the most idiosyncratic risk?
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Financial Management Principles and Application
Authors: Arthur J. Keown, J. William Petty, David F. Scott, Jr.
10th edition
536514119, 536514110, 978-0536514110
