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Types Of Risk Essay

1633 words - 7 pages

systematic risk and unsystematic risk
In finance, systematic risk, sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk associated with aggregate market returns.
By contrast, unsystematic risk, sometimes called specific risk, idiosyncratic risk, residual risk, or diversifiable risk, is the company-specific or industry-specific risk in a portfolio, which is uncorrelated with aggregate market returns.
Unsystematic risk can be mitigated through diversification, and systematic risk can not be.[1]
Systematic risk should not be confused with systemic risk, the risk of loss from some catastrophic event that collapses the entire financial system.
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It’s attributable to firm-specific events, such as strikes, lawsuit, regulatory actions, and loss of a key account. Unsystematic risk is due to factors specific to an industry or a company like labor unions, product category, research and development, pricing, marketing strategy etc.
While the non-diversifiable risk (also known as systematic risk) is the relevant portion of an asset’s risk attributable to market factors that affect all firms such as war, inflation, international incidents, and political events. It cannot be eliminated through diversification and the combination of a security’s non-diversifiable risk and diversifiable risk is called total risk.
In the other word Systematic risk is due to risk factors that affect the entire market such as investment policy changes, foreign investment policy, change in taxation clauses, shift in socio-economic parameters, global security threats and measures etc. Systematic risk is beyond the control of investors and cannot be mitigated to a large extent. In contrast to this, the unsystematic risk can be mitigated through portfolio diversification. It is a risk that can be avoided and the market does not compensate for taking such risks.

However the systematic risks are unavoidable and the market does compensate for taking exposure to such risks.

Main stages of the investment process. According to the formation of investment portfolio, the investment process becomes importantly easier at the expense of reducing its stages. In the foreign literature dedicated to this problem, they differ following stages of the investment process:
1.  Selection of the investment policy;
2.  analyzes of the investment market;
3.  re-inspecting the portfolio of the securities;
4.  estimating the investment effectiveness.
At the first stage they define the investment goals and the volume of the necessary sources for its realization, also the quality of risk and profitability for every financial instrument. Selecting those financial assets of the potential kind, which may be included into the portfolio, fulfills this stage.
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At the second stage, they concretize the rate of value of the securities’ separate kinds on the foundation of marketing conjuncture formed at the concrete moment and provide the prediction of the share rates’ dynamic of the concrete firm. Such kind of approach is called technical analyze. Basing on the got data they conduct fundamental analyzes. Its essence is analyzing the brought value of all those cash money flows, which is expected to get by the owner of the financial asset.
Third stage of the investment includes selecting concrete assets for the investors, also defining the optimal proportions between the assets in the bounds of investment capital. The bases of it are selection, selection during the operations and the diversification of risk according to total profile.
The fourth stage concerns the periodical estimation of the current portfolio according to the...

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