Economic risk associated with a pool of investment (portfolio). It is composed of two components: unique risk and market risk. Market risk (also called systematic risk, undiversifiable risk) is the single security’s sensitivity to market movement and is generally measured by the beta coefficient: if the beta coefficient is greater than 1, it tends to amplify the overall movements of the markets. By contrast, the unique risk (also called specific risk, residual risk, unsystematic risk) expresses the degree of securities’ correlation and is not associated with market returns. The portfolio risk of diverse individual securities differs from the average of its components, provided that the risks associated to each security are not perfectly correlated. As a consequence, an appropriated diversification can reduce the variance of the portfolio returns.
Editor: Bianca GIANNINI