Question

what is systematic risk? What actions can we then take, in our world of finance, to deal with this type of risk? what is a nonsystematic risk? What actions can we then take, in our world of finance, to deal with this type of risk?

Answer 1

Systematic risk means market risk which can never be diversified and market risk will be arising out of risk due to operating in the market and this can never be eliminated because systematic risk will be embedded with being operational into the market and these are the risk related to the macro factors like inflation,change in interest rates, change in political spectrum of an economy.

Systematic risk can be reduced to some level by proper asset allocation and when they would be an asset allocation between different asset classes, then it is often seen that all the Asset classes at does not have similar movement in various economic situation so they will be protecting the overall portfolio from systematic risk to some extent by proper asset allocation

Unsystematic risk is a type of diversifiable risk which can be completely eliminated by proper diversification into the portfolio and these unsystematic risk will be arising out of form a specific factors so they are particular embedded with the performance of a firm or an industry so they can be eliminated through proper diversification

We can deal with unsystematic risk by diversification into various stocks and assets in order to eliminate the risk associated with the performance of a particular company or industry.