0
It is the risk in financial market or in market general which exists due to factors which are beyond the control of humans or the people working in market and that;s why risk free rate use in market is only exists there to protect the investors from that systemetic risk. This is the risk other than systematic risk and which is due to factors directly controllable by the people dealing in market and market risk premium rate is paid due to compensate this type of unsystematic risk in market.
Total Risk = Systematic Risk + Unsystematic Risk
What else can I help you with?
Distinguish between systematic and unsystematic risks?
It is the risk which is due to the factors which are beyond the control of the people working in the market and that's why risk free rate of return in used to just compensate this type of risk in market. This is the risk other than systematic risk and which is due to the factors which are controllable by the people working in market and market risk premium is used to compensate this type of risk. Total Risk = Systematic risk + Unsystematic Risk
How many types of risks in finance?
There is Micro risk and Macro risk Under Micro risk 1. Systematic risk 2.Unsystematic risk Under macro risk 1.Finance Risk 2.Market Risk 3.Credit Risk 4.Country Risk. 5.Cash Risk
Why there no reason to believe that the market will reward investor with additional return for assuming unsystematic risk?
There is no reason to believe that the market will reward investors for assuming unsystematic risk because this type of risk is specific to individual assets and can be diversified away. As investors build diversified portfolios, the unique risks associated with individual securities diminish, leading to the conclusion that only systematic risk, which affects the entire market, is compensated through higher expected returns. Therefore, the market does not provide an additional return for bearing risks that can be eliminated through diversification.
Can the risk of a portfolio be reduced to zero by increasing the number of stocks in the portfolio?
No, the risk of a portfolio cannot be reduced to zero by simply increasing the number of stocks. While diversification can lower unsystematic risk (the risk specific to individual stocks), it cannot eliminate systematic risk, which affects all stocks due to market-wide factors. Therefore, while adding more stocks can help mitigate some risks, it does not completely eliminate them.
How interpret the market risk of a security?
a security's risk is divided into systematic (Market risk) and Unsystematic risk (Diversifiable risk), the market risk is the risk inherent to the security, it is attributed to macro economic factors such as inflation, war etc. and affects all securities in the market and so cannot be diversified away. Market risk of a security is measured and reflected by the Beta coefficientwhich is an index that measures the security's volatility to market movements i.e. how much the returns of the security will vary if their changes in the market
Does standard deviation measure systematic or unsystematic risk?
Standard deviation is a measure of total risk, or both systematic and unsystematic risk. Unsystematic risk can be diversified away, systematic risk cannot and is measured as Beta.
Distinguish between systematic and unsystematic risks?
It is the risk which is due to the factors which are beyond the control of the people working in the market and that's why risk free rate of return in used to just compensate this type of risk in market. This is the risk other than systematic risk and which is due to the factors which are controllable by the people working in market and market risk premium is used to compensate this type of risk. Total Risk = Systematic risk + Unsystematic Risk
What is contrast systematic and unsystematic risk?
Systematic risk, also known as market risk, affects the overall market and cannot be diversified away. It includes factors like interest rates, inflation, and economic downturns. Unsystematic risk, also known as specific risk, is unique to a particular company or industry and can be minimized through diversification. It includes factors like management changes, lawsuits, and competition.
Distingush between systematic and unsystematic risks which is often regarded as the only relevant risk and why?
It is the risk which is due to the factors which are beyond the control of the people working in the market and that's why risk free rate of return in used to just compensate this type of risk in market. This is the risk other than systematic risk and which is due to the factors which are controllable by the people working in market and market risk premium is used to compensate this type of risk. Total Risk = Systematic risk + Unsystematic Risk As systematic risk is beyond the control of people working in market that;s why it is defenately not the relevent risk because anything not controllable is irrelevant and that's why unsystematic risk is the relevant risk because it is in the control of investor to in which security to invest or not.
What are the two types of risk?
The two primary types of risk are systematic risk and unsystematic risk. Systematic risk, also known as market risk, affects the entire market or economy and cannot be diversified away, such as changes in interest rates or economic recessions. Unsystematic risk, on the other hand, is specific to a particular company or industry and can be mitigated through diversification, like a company's poor management or operational issues.
Can Systematic risk can be eliminated by diversification?
No, systematic risk cannot be eliminated by diversification. Systematic risk, also known as market risk, affects all securities and is tied to factors like economic changes, interest rates, and geopolitical events. While diversification can reduce unsystematic risk (specific to individual assets), it cannot mitigate the inherent risks that impact the entire market. Investors can, however, manage systematic risk through strategies like asset allocation and hedging.
How many types of risks in finance?
There is Micro risk and Macro risk Under Micro risk 1. Systematic risk 2.Unsystematic risk Under macro risk 1.Finance Risk 2.Market Risk 3.Credit Risk 4.Country Risk. 5.Cash Risk
What is systematic risk?
Systematic risk, also known as market risk, refers to the inherent risk that affects the entire market or a large segment of it, rather than a specific company or industry. This type of risk arises from factors such as economic downturns, political instability, or changes in interest rates, which can impact all investments. Unlike unsystematic risk, which can be mitigated through diversification, systematic risk cannot be eliminated and must be managed through strategies like asset allocation. Investors often measure systematic risk using beta, which indicates how a security's price moves in relation to the overall market.
Why there no reason to believe that the market will reward investor with additional return for assuming unsystematic risk?
There is no reason to believe that the market will reward investors for assuming unsystematic risk because this type of risk is specific to individual assets and can be diversified away. As investors build diversified portfolios, the unique risks associated with individual securities diminish, leading to the conclusion that only systematic risk, which affects the entire market, is compensated through higher expected returns. Therefore, the market does not provide an additional return for bearing risks that can be eliminated through diversification.
Risk that affects a single company is called risk?
Risk that effects a single company is called unsystematic risk. This type of risk may be diversified away by incorporating non-correlating assets into a portfolio. Unsystematic risk differs from systemic risk, which are risks that effect all companies regardless of their industry or sector and cannot be diversified away.
What are the advantages and disadvantages of capital asset pricing model?
It considers only systematic risk, reflecting a reality in which most investors have diversified portfolios from which unsystematic risk has been essentially eliminated. It generates a theoretically-derived relationship between required return and systematic risk which has been subject to frequent empirical research and testing. It is generally seen as a much better method of calculating the cost of equity than the dividend growth model (DGM) in that it explicitly takes into account a company’s level of systematic risk relative to the stock market as a whole. It is clearly superior to the WACC in providing discount rates for use in investment appraisal.
What is the appropriate measure of risk for an asset held in a diversified portfolio?
The appropriate measure of risk for an asset held in a diversified portfolio is its systematic risk, often quantified by beta. Beta reflects the asset's sensitivity to market movements and indicates how much the asset's returns are expected to change in relation to changes in the overall market. Unlike total risk, which includes unsystematic risk that can be mitigated through diversification, systematic risk captures the inherent risk associated with market-wide factors. Thus, for investors in a diversified portfolio, beta is the key metric for assessing an asset's contribution to overall portfolio risk.
