Question

Can you guys answer this question for me please, need it asap!!!

Please explain the difference between systematic and unsystematic risk. In doing so, provide 4 examples of each type of risk. ( around ~200 words)

Answer 1

The Systematic risks are associated with the market and its fluctuations due to factors concerning politics, society and economics. In other words, these risks are at the macro-level and effecting each and every securities equally. The rise and fall of the market is more of these risks. The systematic risks are classified into

a) Interest risk, which are the fluctuations in the international interest rate

b) Exchange risk, which are the changes in the exchange in currency rates

c) Inflation risk, which come up on the rise in the purchasing power at different points of time

d) market risk, which is due to fluctuations in the share price due to change in other securities prices.

On the other hand, the unsystematic risk are the risks which are associated with the security itself and concerns about the factors which are at the micro or company level like profitability and turnover of the company. The risk can be controlled by proper steps on the part of the company itself. The risk can be classified under few parts, which are

i) business risk, which is due to the bad perfomance of the company like lose of turnover and profitability which turned into heavy loss due to change in technology and product degradation.

ii) management risk, which is due to the change and performance of the management of the company

iii) financial risk, which is due to the capital structure of the organisation itself. Higher the leverage, higher the financial risk of the company due to rise in interest expense.

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