Explain the Concepts of Unique Risk, Market Risk, and How

question 8

Essay

Explain the concepts of unique risk, market risk, and how the total level of portfolio risk can change by adding additional securities.

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Definitions:

Z score

A numerical metric that represents how a specific value's deviation relates to the average of a dataset, quantified by the number of standard deviations away from that average.

Normal Curve

A bell-shaped curve, also known as a Gaussian distribution, representing the spread of a variable in a way that most values cluster around the mean.

Standard Deviation

A statistic that measures the dispersion or variability of a dataset relative to its mean, indicating how spread out the data points are.

Raw Scores

The initial, unaltered scores obtained in an assessment before undergoing any transformation or normalization.