【正文】 y affect that pany and, perhaps, a few others (such as primary petitors and suppliers). It is unlikely to have much of an effect on the world oil market, however, or on the affairs of panies not in the oil business, so this is an unsystematic event. Systematic and unsystematic ponents of return The distinction between a systematic risk and an unsystematic risk is never really as exact as we make it out to be. Even the most narrow and peculiar bit of news about a pany ripples through the economy. This is true because every enterprise, no matter how tiny, is a part of economy. It’s like the tale of a kingdom that was lost because one horse lost a shoe. This is mostly hairsplitting, however. Some risks are clearly much more general than others. We’ll see some evidence on this point in just a moment. The distinction between the types of risk a llows us to break down the surprise portion, U, of the return on the Flyers stock into two parts. Earlier, we had the actual return broken down into its expected and surprise ponents: R = E (R) + U We now recognize that the total surprise ponent for Flyers, U, has a systematic and an unsystematic ponent, so: R = E (R) + systematic portion + unsystematic portion Systematic risks are often called market risks because they affect most assets in the market to some degree. The important thing about the way we have broken down the total surprise, U, is that the unsystematic portion is more or less unique to Flyers. For this reason, it is unrelated to the unsystematic portion of return on most other assets. To see why this is important, we need to return to the subject of portfolio risk. Diversification and portfolio risk We’ve seen earlier that portfolio risks can, in principle, be quite different from the risks of the assets that make up the portfolio. We now look more closely at the riskiness of an individual asset versus the risk of a portfolio of many different assets. We will once again examine some market history to get an idea of what happens with actual investments in capital markets. The effect of diversification: another lesson from market history In our previous chapter, we saw that the standard deviation of the annual return on a portfolio of 500 large mon stocks has historically been about 20 percent per year. Does this mean that the standard deviation of the annual return on a typical stock in that group of 500 is about 20 percent? As you might suspect by now, the answer is no. this in an extremely important observation. To allow examination of the relationship between portfolio size and portfolio risk, illustrates typical average annual standard deviation for equally weighted portfolio that contain different numbers of randomly selected NYSE securities, In column 2 of , we see that the standard deviation for a “portfolio” of one security is about 49 percent. What this means is that if you randomly selected a single NYSE stock and put all your money into it, your standard deviation of return would typically be a substantial 49 percent per year. If you were to randomly select two stocks and invest half your money in each, your standard deviation would be about 37 percent on average, and so on. The important thing to notice in is that the standard deviation declines as the number of securities is increased. By the time we have 100 randomly chosen stocks, the portfolio’s standard deviation has declined by about 60 percent, from 49 percent to about 20 percent. With 500 securities, the standard deviation is percent, similar to the 20 percent we saw in our previous chapter for the large mon stock portfolio. The small difference exists because the portfolio securities and time periods examined are not identical. The principle of diversification Figure illustrates the point we’ve been discussing. What we have plotted is the standard deviation of return versus the number of stocks in the portfolio. Notice in figure that the benefit in terms of risk reduction from adding securities drops off as we add more. By the time we have 10 securities, most of the effect is already realized, and by the time we get to 30 or so, there is very little remaining benefit. illustrates two key points. First, some of the riskiness associated with individual assets can be eliminated by forming portfolio. The process of spreading an investment across assets(and thereby forming a portfolio) is called diversification. The principle of diversification tells us that spreading an investment across many assets will eliminate some of the risk. The blue shaded area in , labeled “diversifiable risk” is the part that can be eliminated by diversification. The s