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Business risk is typically described as the exposure a company or organization has to a number of factors that may lower the...

Business risk is typically described as the exposure a company or organization has to a number of factors that may lower the company’s profits, which may trigger a business failure. Although there are many business risks, two major risk categories are systematic risks and unsystematic risks. 

Respond to the following in a minimum of 175 words: 

Explain the differences between systematic risks and unsystematic risks. 


Briefly discuss two sources of systematic risks and two sources of unsystematic risks. 


Solutions

Expert Solution

Systematic risks are otherwise known as Market risks, are those risks arising due to macro economic factors. As these risks affect the entire macro economy such risks cannot be diversified as the entire portfolio would be affected.

Some of the examples of a systematic risk are

a) Recession

A recession affects the entire economy and every asset class including debt, equity would be affected due to this phenomena. Any attempt to diversify would not fetch returns for the investor.

b) Corporate Tax

Any attempt by the government to tinker with the corporate tax can affect both debt and equity instruments, thus adding to the systematic risks

On the other hand ,unsystematic risks arise due to the risks inherent in the firm or firm specific risks. These risks can be diversified by an investor to yield the benefits of risk mitigation. Some of the major unsystematic risks are

a) Credit Risk

A particular firm may be facing liquidity crunch and as a result unable to pay its creditors. This could give rise to credit risk and  as a result such a risk can be diversified by an investor.

b) Exchange rate risk

A firm that is majorly focused on export revenue may face exchange risk if not properly hedged. Such firms can also be considered for diversification by an investor if he/she wishes to reduce the risk arising from it.

jeff jeffy answered 1 year ago
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