Question

With examples, explain the differences between systematic risks and unsystematic risks.

Answer 1

Unsystematic risk:

1. Unsystematic risk refers to risk which is emerged out of known variables or controlled variables that are related to specific security or particular industry.
2. Unsystematic risk is controllable in nature and influenced by internal factors.
3. It affects only particular security or industry.
4. Business risk and financial risks are the types of unsystematic risk.
5. Examples of unsystematic risk

• poltical and legal factors
• economic conditions
• Bad entrepreneurship

Systematic risk:

1. Systematic risk refers to the risks are that are not industry or security specific. Generally it is refered to a danger that is related to the whole market or segment in market.
2. Systematic rish is uncontrollable in nature and is influenced by external factors
3. It affects large number of securities in a market.
4. Interest risk,purchasing power risk and market risk are the types of systematic risk.
5. Examples of systematic risk

• Increase in interest rates
• Tax reforms
• changes in laws
• Natural disasters
• Changes in currency value
• Banking failures