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No, only if the portfolio is on the efficient frontier. There are many sub-optimal portfolios that do not have the best return/risk trade-off, like portfolios w
by smabie 6y ago
No, only if the portfolio is on the efficient frontier. There are many sub-optimal portfolios that do not have the best return/risk trade-off, like portfolios with a lot of specific risk. Check out the Markowitz Bullet.
Specific risk does not get compensated because it is easy to eliminate it with diversification.
- xapata 6y agoI should have been more specific (no pun intended). You should take a closer read of my comment. You've made the same misinterpretation a second time. Suppose a non-diversified investor, A, owns an asset which has both systemic risk and specific risk, and a diversified investor, B, has the same knowledge as A. In this case, B would be willing to pay a higher price for the asset than A would. A then sells the asset to B and the market becomes efficient. No assets would exist not on the efficient frontier.