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Step 8: Riskese

such as war, recession, inflation, and government intervention. In contrast, unsystematic risk refers to threats specific to individual companies, such as lawsuits, fraud and competition. A summary of these different risks is presented in the top portion of Figure 8-4. Systematic risk, or the risk of investing in capitalism itself, has rewarded investors with an approximate 9.6% total U.S. market annualized return over the last 86 years (6.1% above the risk-free rate). However, an investment in unsystematic risk, such as buying individual stocks, does not increase expected returns. Unsystematic risk should be avoided through diversification, thereby maximizing portfolio efficiency and expected returns at each level of risk. Figure 8-5 illustrates the lack of increased expected Figure 8-5

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