The return of any stock consists on:
– the normal or expected return ( part of the return that shareholders in the market
predict or expect). It depends on all of the information shareholders have that bears the
stock, and it uses all of our understanding of what will influence the stock in the next
month.
–
– uncertain or risky return ( this is the portion that comes from information that wll be
revealed within the month.
Ex.: News about the research, government figures about the GNP, discovery that a
rival’s products have been tampered with, news that sales figures are higher than
expected, a sudden drop in interest rates, an unexpected retirement of founder or
president.
– Systematic risks will affects/ influence all assets in the market to some extent.
• Why is some risk diversifiable?
Because some risks (unsystematic) affect only a specific security, a sector, or a
company, and when put into a diverse portfolio, gain or loss as a result of a specific
event, will compensate by the loss or gain among other securities.
