Question

You are evaluating the required return of General Motors, and are looking at the various operational and costs risks they face. Which of the following is an example of a systematic (non-diversifiable) risk?

Answer 1

Firstly there are two type of risk: Systematic Risk and Unsystematic risk

Unsystematic risk, also known as "specific risk," "diversifiable risk" or "residual risk," is the type of uncertainty that comes with the company or industry you invest in. It mainly impact a very small no of users mainly limited to that organisation ony.

Systematic risk, also known as "market risk" or "un-diversifiable risk", is the uncertainty inherent to the entire market or entire market segment. it mainly impacts people/organisation at mass.

In the above given study or as per the fact of the cses we are evaluating the required rate of return of General Motors and we are looking at various operational and cost risk they face which have impact them as systematic risk.

Following examples of Systematic risk for General Motors may be:

1.Rise in interest rate i.e. a rise in interest rate will increase the cost of funds for the company leads to lower earnings.

2. Purchasing power Risk i.e.a decrease in purchasing power of customer will lead to lower sales value and will affect the profitability.

3. Market Risk i.e.market risk is potential risk due to volatility in market, hence this is also not avoidable. Hence it is a systematic risk.

So, all those risk which are not in control of the organisation can be called systematic risk.