Systematic & Unsystematic Risk

Topics: Capital asset pricing model, Investment, Modern portfolio theory Pages: 3 (941 words) Published: December 3, 2012
Running Head: SYSTEMATIC AND UNSYSTEMATIC RISK
Stacie Hopkins
Phase 1 Discussion Board
FINC605-1204B-01
Corporate Portfolio Management
Colorado Technical University Online
For Professor Doug Smith
Introduction
We have been asked by John Stewart, an investment advisor who has recently joined ACG, to help prepare some educational material for a seminar taking place later this month. In this discussion board post, we will be discussing systematic and unsystematic risk as well as a stock’s beta coefficient and how it ties into systematic versus unsystematic risk. Systematic Risk

Systematic risk is “associated with market returns and can be attributed to broad factors such as macroeconomic factors” (Faulkenberry, 2012). Macroeconomic factors can be sources of systematic risk. Some macroeconomic factors that can be sources of systematic risk include changes in the interest rates, currency fluctuations, inflation, civil and political wars, or a recession. A factor that influences the direction and volatility of the entire market is considered to be a systematic risk. A systematic risk “can be partially mitigated by asset allocation” (Faulkenberry, 2012). A portfolio with “different asset classes with low correlation can smooth portfolio returns because asset classes react differently to macroeconomic factors” (Faulkenberry, 2012). For example, while some of the asset classes are decreasing others can be increasing and vice versa thereby offsetting some of the losses. Unsystematic Risk

Unsystematic risk is “company or industry specific risk” (Faulkenberry, 2012). Unlike systematic risk this type of risk can be “attributable or specific to the individual investment or small group of investments” (Faulkenberry, 2012). Unsystematic risk is also known as diversifiable risk or residual risk. Sources of this type of risk are employee strikes, the outcome of an unfavorable litigation, a natural catastrophe, credit or legal issues, etc. Diversification is a way that...
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