To determine: The difference between systematic risk and unsystematic risk.
Introduction:
Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.
Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.
Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.
Explanation of Solution
The following are the differences between systematic risk and unsystematic risk:
- Systematic risks are type of risks that cannot be differentiated through the construction of a portfolio.
- Normally, systematic risk factors influence a substantial number of firms in the market, though those elements will not really influence all organizations similarly.
- Unsystematic risk can be diversified or reduced through portfolio development.
- Unsystematic risk issues are particular to the firm or industry.
- While, some components impact the profitability of an industry/firm; it does not in another firm/industry. However, it can be applicable for different firms in same industry.
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Chapter 12 Solutions
Corporate Finance
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