specific risk

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The risk associated with each of the individual assets in a portfolio, as opposed to the systematic risk associated with the market as a whole. It can be eliminated by diversification. Portfolio theory holds that investors should maintain a diversified portfolio in order to maximize the utility of their investments. Because specific risk can be eliminated in this way, there is no requirement for a risk premium for taking specific risks. This is an important underlying principle of the capital asset pricing model and arbitrage pricing theory. Specific risk is measured by the alpha coefficient.

Subjects: Financial Institutions and Services.

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