A rational investor would not invest in an asset which does not improve the risk-return

Characteristics of his existing portfolio. Since a rational investor would hold the
market portfolio, The asset in question will be added to the market portfolio.
Specific risk is the risk associated with individual assets - within a portfolio these
risks can be Reduced through diversification. Systematic risk, or market risk,
Refers to the risk common to all securities - except for selling short as noted
below, systematic Risk cannot be diversified away (within one market). Within
the market portfolio, asset specific Risk will be diversified away to the extent
possible.