Session 13

 10-02-2026

The focus of todays session was the relationship between risk and return, particularly through the classification of systematic and unsystematic risk. We also discussed how actual returns consist of both expected and unexpected components, with the unexpected portion representing the uncertainty investors face. The concept of diversification was introduced as a method for reducing company-specific risks.

From my perspective, this session clarified an important principle in financial economics: not all risks are rewarded with higher returns. Systematic risk, which affects the entire market, cannot be eliminated through diversification and therefore plays a central role in determining expected returns. In contrast, unsystematic risk can be minimized by holding a diversified portfolio. This realization shifted my perspective on investment strategy. Instead of focusing on individual stocks, I now see the importance of portfolio construction and asset allocation as key tools for managing financial risk.

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