But let’s leave the mathematics aside for a moment and discuss risk in intuitive terms. It seems clear enough that as we move from one broad asset class to another we’ll see a trade-off. U.S. Treasury bonds are safer, and produce a much lower return, than do corporate stocks. Can we get more granular? Can we look within the world of corporate stocks and define subsets of that asset class, and find the same trade-off at work? There are various sorts of risk. There are risks associated with the economy as a whole (the risk that the whole ocean will dry up so all the boats will find themselves on the bottom); the risk associated with specific markets or products (the risk that the horseless carriage will hurt all the buggy whip manufacturers); and the risk associated with one specific firm due, for example, to the excellence or incompetence of its managers. These are known as systemic risk, market risk, and idiosyncratic risk, respectively. How might you protect agai...