Explain the differences between total risk, unsystematic risk, and systematic risk.

Explain the differences between total risk, unsystematic risk, and systematic risk. Identify which risk is measured by standard deviation and which is measured by beta.

Expert Solution

Total risk is the risk assumed by the investor by purchasing a stock or investing in a portfolio. It includes both systematic and unsystematic risk.

Systematic risk is the risk that not be avoided and must be borne by every investor. It cannot be diversified through any portfolio and any attempt to diversify, the portfolio will always have systematic risk although in lesser effects. It is the market risk and uncontrollable.

Unsystematic risk is one which can be eliminated or reduced through diversification of the portfolio and is usually controllable. It is the risk that arises out of the company's internal deficiencies and restricted to the specific stock or industry.

Systematic risk is measured by beta and total risk is measured by standard deviation.

jeff jeffy answered 2 years ago

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