One-Factor models The feature of diversification is true of any one-factor model. Factor risk: (bi02 K Nonfactor risk k Diversification leads to an averaging of factor risk k Diversification reduces nonfactor riskOne-Factor Models – The feature of diversification is true of any one-factor model. «Factor risk: «Nonfactor risk: «Diversification leads to an averaging of factor risk «Diversification reduces nonfactor risk ( ) 2 2 bi  F 2 ei 