QS Study

The difference between systematic risk and unsystematic risk are:

Systematic Risk

  • Definition: Systematic risk is that portion of the security risk which cannot be diversifiable from portfolio combination and which usually arises from the movement of the market or economic forces.
  • Nature: Uncontrollable.
  • Affects: Large number of securities in the market.
  • Measurement: Systematic risk is measured by beta.
  • Diversification: Cannot be diversified.
  • Factors: External factors
  • Types: Interest risk, market risk, and purchasing power risk.
  • Return expectation: As it cannot be diversified investors require a premium or return for this risk.
  • Protection: Asset allocation.

Unsystematic Risk

  • Definition: Unsystematic risk is that portion of the security risk which can be diversifiable through portfolio formation.
  • Nature: Controllable.
  • Affects: Only particular company.
  • Measurement: Unsystematic risk is measured by error term epsilon.
  • Diversification: Can be diversified.
  • Factors: Internal factors.
  • Types: Business risk and financial risk.
  • Return expectation: Investors don’t except return against unsystematic risk because it can be diversified away.
  • Protection: Portfolio diversification
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