You found following information about a portfolio and the market.
Portfolio beta = 1.20
Variance of the portfolio return = 18%
Variance of the market portfolio return = 12%

Required to:
a. decompose the portfolio variance into the systematic and the idiosyncratic risk.
b. Is this portfolio well-diversified?

Answer rating: 100% (QA)

To decompose the portfolio variance into systematic and idiosyncratic risk we can use the Capital Asset Pricing Model CAPM and the formulas for portfo... View the full answer