Final answer:
The unexpected return in the total return equation consists of the unsystematic and systematic portions. The unsystematic portion relates to risks specific to a single company, while the systematic portion relates to market-wide risks. The correct answers are unsystematic portion and the systematic portion.
Step-by-step explanation:
The two components of unexpected return (u) in the total return equation are the unsystematic portion and the systematic portion. The unsystematic portion, also known as idiosyncratic or specific risk, relates to factors that affect a single company or a small number of companies, such as a change in management or a product recall. It can be mitigated through diversification.
The systematic portion, also called market risk, relates to factors that affect the entire market, such as changes in interest rates, economic recessions, or political unrest. It cannot be eliminated through diversification and is relevant to all investments.