Systematic and Unsystematic Risks

The deviation from the anticipated return is caused by is explained by 2 levels of risk: systematic risks and unsystematic risks. The sum of these two main categories of risk is the total risk to which an investor is exposed to.

Systematic risk is associated with overall movements in the general market or economy and therefore is often referred to as the market risk. The market risk is the component of the total risk that cannot be eliminated through portfolio diversification. These are also known as undiversifiable risks. Many academics believe that reward for credit risk from the portfolio angle is the return for systematic risk undertaken by the lenders (because all non-systematic risk can be diversified away).

Unsystematic risks are the component of the portfolio risk that can be eliminated by increasing the portfolio size, the reason being that risks that are specific to an individual security such as business or financial risk can be eliminated by constructing a well-diversified portfolio. These are known as diversifiable risks. One example of unsystematic risk is a C.E.O. resigning from the post. It is company wide issue, not the nation or economy wide.

Leave a Reply

Your email address will not be published. Required fields are marked *


x

Related Posts

Perpetual Inventory System
What is Perpetual Inventory System? A company using a perpetual inventory system keeps a continuous record of the physical quantities in its inve...
Business Valuation Software
Businesses planning to close, merge or acquire another company need to undergo the process of business valuation. An accurate and up-to-date valu...
Hedge Funds - Meaning
Hedge funds are private investment organisations in Europe and USA. These are generally structured are limited liability partnership with the gen...
powered by RelatedPosts