Question

1) Explain the systematic risk and unsystematic risk by using mathematical 3 examples if it is possible 2) create 3 multiple questions and solve it related to systematic risk and unsystematic risk 3) create 3 true/false questions and solve it related to systematic risk and unsystematic risk

Answer 1

PART 1

• Systematic risk is the market risk that exists in a well-diversified portfolio of assets. For example, the risk of failure of the economy of a country is a market risk.
• Unsystematic risk is the asset specific risk that exists in a less diversified portfolio for assets. For example, the risk of failure of internal management is an unsystematic risk

MATHEMATICALLY,

1. Using CAPM equation, systematic risk measurement : Expected Return = Risk free rate + Beta (Market return - risk free rate) + error term
2. Beta is a measurement of systematic risk = Beta of a portfolio (P) = Correlation (portfolio return, market return)* portfolio standard deviation / market standard deviation
3. Total risk (standard deviation) of a portfolio = systematic risk + unsystematic risk

PART 2

	Measure of systematic risk is:-
a)	Gamma
b)	Beta
c)	Delta

	Formula for systematic risk in CAPM equation of a stock is:-
a)	Covariance (Stock return, Market return)/Variance (Stock Return)
b)	Covariance (Stock return, Market return)/Variance (Market Return)
c)	Correlation (Stock return, Market return)/Variance (Market Return)

	If β > 1, this implies that the correlation between the market and the portfolio is:-
a)	positive
b)	negative
c)	inverse

PART 3

Beta is a meaure of unsystematic risk	FALSE
Systematic risk is reduced by diversification of portfolio	FALSE
Unsystematic risk is stock specific	TRUE