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We started talking about risk and diversification last week. I want you to find an example...

We started talking about risk and diversification last week. I want you to find an example of economic, market sector (such as tech), or company specific risk. Find an article of one of these types of risk and lets talk about whether this specific risk can be managed in finance through diversification.

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Systematic risk or market risk- It is the overall risk that is related to overall market. This risk may arise due to change in politics, economical, financial and monetary policy, change in Government, inflation, slowdown, recession etc. This risk cannot be controlled, it affects overall market. It cannot be controlled by diversification because there are some not known and uncertain events that create this risk.

Unsystematic risk or Industry/company specific risk- This risk is related to particular company or industry. This risk arises due to policies and key people change in company, due to loss and heavy debt of company, due to industry life cycle etc. This risk can be controlled by diversification. If investors want to minimize the risk, they need to diversify their portfolio, they should not invest into a company or industry that is looking risky or cyclical, they should diversify by investing the money into different asset class and companies of different industries so that portfolio may be balanced.

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