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Systematic & Unsystematic Risk of Business

# Systematic & Unsystematic Risk of Business

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In finance, the capital asset pricing model (CAPM) is used to determine a theoretically
appropriate required rate of return of an asset, if that asset is to be added to an
already well-diversified portfolio, given that asset's non-diversifiable risk. The
model takes into account the asset's sensitivity to non-diversifiable risk (also known
as systematic risk or market risk), often represented by the quantity beta (β) in the
financial industry, as well as the expected return of the market and the expected
return of a theoretical risk-free asset.
The model was introduced by Jack Treynor (1961, 1962)[1]

, William Sharpe (1964),
John Lintner (1965a,b) and Jan Mossin (1966) independently, building on the
earlier work of Harry Markowitz on diversification and modern portfolio theory.
Sharpe, Markowitz and Merton Miller jointly received the Nobel Memorial Prize
in Economics
for this contribution to the field of financial economics.

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The formula

The CAPM is a model for pricing an individual security or a portfolio. For individual
securities, we made use of the security market line (SML) and its relation to expected
return and systematic risk (beta) to show how the market must price individual securities
in relation to their security risk class. The SML enables us to calculate the reward-to-risk
ratio for any security in relation to that of the overall market. Therefore, when the
expected rate of return for any security is deflated by its beta coefficient, the reward-to-
risk ratio for any individual security in the market is equal to the market reward-to-risk
ratio, thus:

The market reward-to-risk ratio is effectively the market risk premium and by rearranging
the above equation and solving for E(Ri), we obtain the Capital Asset Pricing Model
(CAPM).

where:

is the expected return on the capital asset

is the risk-free rate of interest such as interest arising from government bonds

(the beta coefficient) is the sensitivity of the asset returns to market returns, or

also

,

is the expected return of the market

is sometimes known as the market premium or risk premium (the
difference between the expected market rate of return and the risk-free rate of
return).

The Security Market Line, seen here in a graph, describes a relation between the beta and
the asset's expected rate of return.

34

Restated, in terms of risk premium, we find that:

which states that the individual risk premium equals the market premium times β.

Note 1: the expected market rate of return is usually estimated by measuring the
Geometric Average of the historical returns on a market portfolio (i.e. S&P 500).

Note 2: the risk free rate of return used for determining the risk premium is usually the
arithmetic average of historical risk free rates of return and not the current risk free rate of
return.

For the full derivation see Modern portfolio theory.

Risk and diversification

The risk of a portfolio comprises systematic risk, also known as undiversifiable risk, and
unsystematic risk which is also known as idiosyncratic risk or diversifiable risk.
Systematic risk refers to the risk common to all securities - i.e. market risk. Unsystematic
risk is the risk associated with individual assets. Unsystematic risk can be diversified
away to smaller levels by including a greater number of assets in the portfolio (specific
risks "average out"). The same is not possible for systematic risk within one market.
Depending on the market, a portfolio of approximately 30-40 securities in developed
markets such as UK or US will render the portfolio sufficiently diversified to limit
exposure to systematic risk only. In developing markets a larger number is required, due
to the higher asset volatilities.

A rational investor should not take on any diversifiable risk, as only non-diversifiable
risks are rewarded within the scope of this model. Therefore, the required return on an
asset, that is, the return that compensates for risk taken, must be linked to its riskiness in a
portfolio context - i.e. its contribution to overall portfolio riskiness - as opposed to its
"stand alone riskiness." In the CAPM context, portfolio risk is represented by higher
variance i.e. less predictability. In other words the beta of the portfolio is the defining
factor in rewarding the systematic exposure taken by an investor.

The efficient frontier

Main article: Efficient frontier

35

The (Markowitz) efficient frontier. CAL stands for the capital allocation line.

The CAPM assumes that the risk-return profile of a portfolio can be optimized - an
optimal portfolio displays the lowest possible level of risk for its level of return.
Additionally, since each additional asset introduced into a portfolio further diversifies the
portfolio, the optimal portfolio must comprise every asset, (assuming no trading costs)
with each asset value-weighted to achieve the above (assuming that any asset is infinitely
divisible). All such optimal portfolios, i.e., one for each level of return, comprise the
efficient frontier.

Because the unsystematic risk is diversifiable, the total risk of a portfolio can be viewed
as beta.

The market portfolio

An investor might choose to invest a proportion of his or her wealth in a portfolio of risky
assets with the remainder in cash - earning interest at the risk free rate (or indeed may
borrow money to fund his or her purchase of risky assets in which case there is a negative
cash weighting). Here, the ratio of risky assets to risk free asset does not determine overall
return - this relationship is clearly linear. It is thus possible to achieve a particular return
in one of two ways:

1.By investing all of one's wealth in a risky portfolio,
2.or by investing a proportion in a risky portfolio and the remainder in cash (either
borrowed or invested).

For a given level of return, however, only one of these portfolios will be optimal (in the
sense of lowest risk). Since the risk free asset is, by definition, uncorrelated with any
other asset, option 2 will generally have the lower variance and hence be the more
efficient of the two.

This relationship also holds for portfolios along the efficient frontier: a higher return
portfolio plus cash is more efficient than a lower return portfolio alone for that lower level
of return. For a given risk free rate, there is only one optimal portfolio which can be

36

combined with cash to achieve the lowest level of risk for any possible return. This is the
market portfolio.

Assumptions of CAPM

All Investors:

1.Aim to maximize economic utility.
2.Are rational and risk-averse.
3.Are price takers, i.e., they cannot influence prices.
4.Can lend and borrow unlimited under the risk free rate of interest.
5.Trade without transaction or taxation costs.
6.Deal with securities that are all highly divisible into small parcels.
7.Assume all information is at the same time available to all investors.

Shortcomings of CAPM

•The model assumes that asset returns are (jointly) normally distributed random
variables. It is however frequently observed that returns in equity and other
markets are not normally distributed. As a result, large swings (3 to 6 standard
deviations from the mean) occur in the market more frequently than the normal
distribution assumption would expect.
•The model assumes that the variance of returns is an adequate measurement of
risk. This might be justified under the assumption of normally distributed returns,
but for general return distributions other risk measures (like coherent risk
measures) will likely reflect the investors' preferences more adequately.
•The model assumes that all investors have access to the same information and
agree about the risk and expected return of all assets (homogeneous expectations
assumption).
•The model assumes that the probability beliefs of investors match the true
distribution of returns. A different possibility is that investors' expectations are
biased, causing market prices to be informationally inefficient. This possibility is
studied in the field of behavioral finance, which uses psychological assumptions to
provide alternatives to the CAPM such as the overconfidence-based asset pricing
model of Kent Daniel, David Hirshleifer, and Avanidhar Subrahmanyam (2001)[2]
.

•The model does not appear to adequately explain the variation in stock returns.
Empirical studies show that low beta stocks may offer higher returns than the
model would predict. Some data to this effect was presented as early as a 1969
conference in Buffalo, New York in a paper by Fischer Black, Michael Jensen,
and Myron Scholes. Either that fact is itself rational (which saves the efficient-
market hypothesis but makes CAPM wrong), or it is irrational (which saves
CAPM, but makes the EMH wrong – indeed, this possibility makes volatility
arbitrage a strategy for reliably beating the market).
•The model assumes that given a certain expected return investors will prefer lower
risk (lower variance) to higher risk and conversely given a certain level of risk will
prefer higher returns to lower ones. It does not allow for investors who will accept

37

lower returns for higher risk. Casino gamblers clearly pay for risk, and it is
possible that some stock traders will pay for risk as well.
•The model assumes that there are no taxes or transaction costs, although this
assumption may be relaxed with more complicated versions of the model.
•The market portfolio consists of all assets in all markets, where each asset is
weighted by its market capitalization. This assumes no preference between
markets and assets for individual investors, and that investors choose assets solely
as a function of their risk-return profile. It also assumes that all assets are infinitely
divisible as to the amount which may be held or transacted.
•The market portfolio should in theory include all types of assets that are held by
anyone as an investment (including works of art, real estate, human capital...) In
practice, such a market portfolio is unobservable and people usually substitute a
stock index as a proxy for the true market portfolio. Unfortunately, it has been
shown that this substitution is not innocuous and can lead to false inferences as to
the validity of the CAPM, and it has been said that due to the inobservability of
the true market portfolio, the CAPM might not be empirically testable. This was
presented in greater depth in a paper by Richard Roll in 1977, and is generally
referred to as Roll's critique.
•The model assumes just two dates, so that there is no opportunity to consume and
rebalance portfolios repeatedly over time. The basic insights of the model are
extended and generalized in the intertemporal CAPM (ICAPM) of Robert Merton,
and the consumption CAPM (CCAPM) of Douglas Breeden and Mark Rubinstein.

SYSTEMATIC AND UNSYSTEMATIC RISK OF RATES OF RETURN
ASSOCIATED WITH SELECTED FOREST PRODUCTS COMPANIES

The objective of most investors in stocks or other assets is to maximize the expected
returns in a given risk class; in other words, to minimize risk for a given level of
expected returns. Although "risk" may connote the chance of injury or loss, the
term is not defined so narrowly in this article. Rather, it is used to reflect
volatility in stock or other assets' rates of return and should not be confused
with risk and uncertainty in the production process.

Risk, as approached herein, equals the variance of historical rates of return about
the average rate of return.

Total risk of an investor's investment port-folio can be reduced through investment
diversification, that is, by the purchase of different kinds of assets (stocks,
bonds, securities, real estate, etc.) and by the purchase of stocks or bonds from

38

more than one company or industry. However, risk cannot be reduced in this
way beyond a certain limit because changes in over-all market conditions affect
price variations in all stocks and other assets and this variability cannot be
eliminated completely by diversification.

As a result, it is desirable to separate total risk, or variation in rates of return, into
two components-one reflecting that portion of an asset's price movements
caused by changes in the market as a whole and a second reflecting that portion
of an asset's price movements caused by factors or variables unique to the
company or industry itself. The former is called "systematic risk" (and is
nondiversifiable) and the latter "unsystematic risk".

Unsystematic risk, related to such factors as labor strikes, inventions, research and
developments, and the like is diversifiable.

A stock is said to be more desirable for portfolio diversification purposes if only a
small proportion of its volatility can be attributed to the impact of the market
[4], unless, of course, an investor wishes to invest in assets whose rates of return
follow those of the market as a whole. A measurement of systematic and
unsystematic risk is needed from which the percentage of total risk accounted
for by each can be calculated.

The purpose of this article is to measure total, systematic, and unsystematic risk of
the rates of return of a select group of forest products firms.

In measuring risk it is desirable to determine that portion associated with the
market and that portion associated with the company itself.

Are rates of return of forest products companies relatively volatile? Or do they
generally follow market changes and trends? Unsystematic risk will measure the
former and unsystematic risk the latter.

EXAMPLE

Total, systematic, and unsystematic risk associated with the rates of return of five
forest products companies are calculated to illustrate how the model is used. The
firms analyzed are Crown Zellerbach, Potlatch, International Paper, Westvaco,

39

and Weyerhaeuser. Each firm is large, having landholdings and processing
plants in more than one region of the country. The analysis allows total risk and
its components for each of the companies to be compared. In addition, the
results of such an analysis aid in determining whether large forest products
companies are more or less susceptible than companies in other industries to
factors that affect the market as a whole, or to factors which are in herent or
unique to the particular companies or industries themselves.

40

Sources of Systematic vs. Unsys. Risk

What are the Sources of Risk?

Announcements & Exp. Returns

Actual returns (R) will be:
`R + U (expected + unexpected)
Investors form “expectations” about future
Expected information is already discounted by the market
i.e., the value of the information is already incorporated into the stock prices

Attempts to exploit Public information (make large returns) will not be successful.

Surprises

Unexpected Returns: caused by surprises
Surprises can be GOOD or BAD!
Total return (R) = E(R) + U
Announcements are news only to the extent they contain “surprise” element
“No burglary in BG on Sept. 28” --no news
“No burglary in New York on Sept. 28”-- major news!

Systematic vs. Unsys. Surprises

•Systematic risk:

•surprises that affect “large” no. of assets
•Usually in the same “direction”
•I/Rs, Unemployment, Elections, GDP,……

•Unsystematic risk:

•surprises that affect “small” no. of assets
•Some “firm-specific” news turn into “economy-wide” events!!!`
•R = `R + U = `R + m + e

41

Risk: Systematic &Unsystematic

We can break down the risk, U, of holding a stock into two components: systematic risk
and unsystematic risk:

Systematic Risk; m

Nonsystematic Risk;

ε

n

Total risk; U

ε

risk

ic

unsystemat

the

is

risk

systematic

the

is

where

becomes

εm

ε

m

R

R

U

R

R

+

+

=

+

=

σ

42

Risk and Diversification

Risk and Diversification: What Is Risk?

Whether it is investing, driving, or just walking down the street, everyone exposes
themselves to risk. Your personality and lifestyle play a big role in how much risk you are
comfortably able to take on. If you invest in stocks and have trouble sleeping at night, you
are probably taking on too much risk. (For more insight, see A Guide To Portfolio
Construction
.)

Risk is defined as the chance that an investment's actual return will be different than
expected. This includes the possibility of losing some or all of the original investment.

Those of us who work hard for every penny we earn have a harder time parting with
money. Therefore, people with less disposable income tend to be, by necessity, more risk
averse. On the other end of the spectrum, day traders feel if they aren't making dozens of
trades a day there is a problem. These people are risk lovers.

When investing in stocks, bonds, or any investment instrument, there is a lot more risk
than you'd think. In the next section, we'll take a look at the different kind of risk that
often threaten investors' returns.

Risk and Diversification: Different Types of Risk

Let's take a look at the two basic types of risk:

Systematic Risk - Systematic risk influences a large number of
assets. A significant political event, for example, could affect several of the assets
in your portfolio. It is virtually impossible to protect yourself against this type of
risk.

Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific
risk". This kind of risk affects a very small number of assets. An example is news
that affects a specific stock such as a sudden strike by employees. Diversification
is the only way to protect yourself from unsystematic risk. (We will discuss
diversification later in this tutorial).

Now that we've determined the fundamental types of risk, let's look at more

43

specific types of risk, particularly when we talk about stocks and bonds.

Credit or Default Risk - Credit risk is the risk that a company or individual will
be unable to pay the contractual interest or principal on its debt obligations. This
type of risk is of particular concern to investors who hold bonds in their portfolios.
Government bonds, especially those issued by the federal government, have the
least amount of default risk and the lowest returns, while corporate bonds tend to
have the highest amount of default risk but also higher interest rates. Bonds with
a lower chance of default are considered to be investment grade, while bonds with
higher chances are considered to be junk bonds. Bond rating services, such as
Moody's, allows investors to determine which bonds are investment-grade, and
which bonds are junk. (To read more, see Junk Bonds: Everything You Need To
Know
, What Is A Corporate Credit Rating and Corporate Bonds: An Introduction
To Credit Risk
.)

Country Risk - Country risk refers to the risk that a country won't be able to
honor its financial commitments. When a country defaults on its obligations, this
can harm the performance of all other financial instruments in that country as well
as other countries it has relations with. Country risk applies to stocks, bonds,
mutual funds, options and futures that are issued within a particular country. This
type of risk is most often seen in emerging markets or countries that have a severe
deficit. (For related reading, see What Is An Emerging Market Economy?)

Foreign-Exchange Risk - When investing in foreign countries you must consider
the fact that currency exchange rates can change the price of the asset as
well. Foreign-exchange risk applies to all financial instruments that are in a
currency other than your domestic currency. As an example, if you are a resident
of America and invest in some Canadian stock in Canadian dollars, even if the
share value appreciates, you may lose money if the Canadian dollar depreciates in
relation to the American dollar.

Interest Rate Risk - Interest rate risk is the risk that an investment's value will
change as a result of a change in interest rates. This risk affects the value of bonds
more directly than stocks. (To learn more, read How Interest Rates Affect The
Stock Market
.)

Political Risk - Political risk represents the financial risk that a country's
government will suddenly change its policies. This is a major reason why
developing countries lack foreign investment.

Market Risk - This is the most familiar of all risks. Also referred to as volatility,
market risk is the the day-to-day fluctuations in a stock's price. Market risk applies
mainly to stocks and options. As a whole, stocks tend to perform well during a
bull market and poorly during a bear market - volatility is not so much a cause but
an effect of certain market forces. Volatility is a measure of risk because it refers
to the behavior, or "temperament", of your investment rather than the reason for

44

this behavior. Because market movement is the reason why people can make
money from stocks, volatility is essential for returns, and the more unstable the
investment the more chance there is that it will experience a dramatic change in
either direction.

As you can see, there are several types of risk that a smart investor should consider
and pay careful attention to.

Risk and Diversification: The Risk-Reward Tradeoff

The risk-return tradeoff could easily be called the iron stomach test. Deciding what
amount of risk you can take on is one of the most important investment decision you will
make.

The risk-return tradeoff is the balance an investor must decide on between the desire for
the lowest possible risk for the highest possible returns. Remember to keep in mind that
low levels of uncertainty (low risk) are associated with low potential returns and high
levels of uncertainty (high risk) are associated with high potential returns.

The risk-free rate of return is usually signified by the quoted yield of "U.S. Government
Securities" because the government very rarely defaults on loans. Let's suppose that the
risk-free rate is currently 6%. Therefore, for virtually no risk, an investor can earn 6% per
year on his or her money. But who wants 6% when index funds are averaging 12-14.5%
per year? Remember that index funds don't return 14.5% every year, instead they return
-5% one year and 25% the next and so on. In other words, in order to receive this higher
return, investors much also take on considerably more risk.

The following chart shows an example of the risk/return tradeoff for investing. A higher
standard deviation means a higher risk:

45

In the next section, we'll show you what you can do to reduce the risk in your
portfolio with an introduction to the diversification.

Risk and Diversification: Diversifying Your Portfolio

With the stock markets bouncing up and down 5% every week, individual investors
clearly need a safety net. Diversification can work this way and can prevent your entire
portfolio from losing value.

Diversifying your portfolio may not be the sexiest of investment topics. Still, most
investment professionals agree that while it does not guarantee against a loss,
diversification is the most important component to helping you reach your long-range
financial goals while minimizing your risk. Keep in mind, however that no matter how
much diversification you do, it can never reduce risk down to zero. (For related reading,
see Introduction To Diversification and The Importance Of Diversification.)

What do you need to have a well diversified portfolio? There are three main things you
should do to ensure that you are adequately diversified:

1.Your portfolio should be spread among many different investment vehicles such
as cash, stocks, bonds, mutual funds, and perhaps even some real estate.
2.Your securities should vary in risk. You're not restricted to picking only blue chip
stocks. In fact, the opposite is true. Picking different investments with different
rates of return will ensure that large gains offset losses in other areas. Keep in
mind that this doesn't mean that you need to jump into high-risk investments such
as penny stocks!
3.Your securities should vary by industry, minimizing unsystematic risk to small
groups of companies.
Another question people always ask is how many stocks they should buy to reduce
the risk of their portfolio. The portfolio theory tells us that after 10-12 diversified
stocks, you are very close to optimal diversification. This doesn't mean buying 12
internet or tech stocks will give you optimal diversification. Instead, you need to
buy stocks of different sizes and from various industries.

What Is Diversification?

When we talk about diversification in a stock portfolio, we're referring to the attempt by
the investor to reduce exposure to risk by investing in various companies across different
sectors, industries or even countries. Most investment professionals agree that although
diversification is no guarantee against loss, it is a prudent strategy to adopt towards your
long-range financial objectives. (see The Importance of Diversification.) There are many

46

studies demonstrating why diversification works, but this would involve delving into
lengthy arcane financial formulas. Put simply, by spreading your investments across
various sectors or industries with low correlation to each other, you reduce price volatility
by the fact that not all industries and sectors move up and down at the same time or at the
same rate. This provides for a more consistent overall portfolio performance.

It's important to remember that no matter how diversified your portfolio is, your risk can
never be shrunk down to zero. You can reduce risk associated with individual stocks
(what academics call unsystematic risk), but there are inherent market risks (systematic
risk) that affect nearly every stock. No amount of diversification can prevent that.

Can We Diversify Away Unsystematic Risk?

So, up until this point this article has begged the question: how many stocks should you
own to be diversified but not over-diversified? It seems sensible to own five stocks rather
than just one, but at what point does adding more stock to your portfolio cease to
eliminate market risk?

First off, we need to talk about how risk is defined. The generally accepted way to
measure risk is by looking at volatility levels. That is, the more sharply a stock or
portfolio moves within a period of time, the riskier that asset is. A statistical concept
called standard deviation is used to measure volatility. So, for the sake of this article you
can think of standard deviation as meaning "risk".

According to the modern portfolio theory, you'd come very close to achieving
optimal diversity after adding about the 20th stock. In Edwin J. Elton and Martin J.
Gruber's book "Modern Portfolio Theory and Investment Analysis", they conclude
that the average standard deviation (risk) of a portfolio of one stock was 49.2%,
while increasing the number of stocks in the average well-balanced portfolio could
reduce the portfolio's standard deviation to a maximum of 19.2% (this number
represents market risk). However, they also found that with a portfolio of 20 stocks
the risk was reduced to about 20%. Therefore, the additional stocks from 20 to 1,000
only reduced the portfolio's risk by about 0.8%, while the first 20 stocks reduced the
portfolio's risk by 29.2% (49.2%-20%).

47

Many investors have the misguided view that risk is proportionately reduced with
each additional stock in a portfolio, when in fact this couldn't be farther from the
truth. There is strong evidence that you can only reduce your risk to a certain point at
which there is no further benefit from diversification.

True Diversification
The study mentioned above isn't suggesting that buying any 20 stocks equates with
optimum diversification. Note from our original explanation of diversification that
you need to buy stocks that are different from each other whether by company size,
industry, sector, country, etc. Put in financial parlance, this means you are buying
stocks that are uncorrelated – stocks that move in different directions during different
times.

As well, note that this article is only talking about diversification within your stock
portfolio. A person's overall portfolio should also diversify among different asset
classes, meaning allocating a certain percentage to bonds, commodities, real estate,
alternative assets and so on.

Risk and Diversification: Conclusion

Different individuals will have different tolerances for risk. Tolerance is not static, it
will change as your life does. As you grow older tolerance will usually shrink as
more and more obligations come up, including retirement.

There are several different types of risks involved in financial transactions. I
hope we've helped shed some light on these risks. Achieving the right balance
between risk and return will ensure that you achieve your financial goals while
allowing you to get a good night's rest.

48

Preventing Unsystematic Risk

Unsystematic risk is the risk you take on when investing in a stock. Basically it is the risk
of some new announcements, or earnings reports coming out that could affect the price of
the stock.

So if you buy a stock thinking it was a good buy and all of a sudden the company comes
out with earnings that are far below expectation the stock might react harshly causing you
to lose money because of some unforeseen events.

However there are ways in which you can prevent yourself, or lessen your chances of
taking unforeseen losses.

If you are an investor and are holding for the long term one thing you can do is to buy
many different companies. If you only have 1 stock and some bad news comes out about
that stock it will drastically affect your portfolio.

However if you have 20-30 different stocks and some bad earnings comes out for one of
your stocks it will not affect your overall portfolio as much. In fact if your other stocks go
up far enough you might actually make money when one of your stocks has a big surprise.

If you are trading stocks there is still the risk of the unforeseen happening. So you should
still be prepared for it by using things like stop losses and risk management.

Another great idea to limit your unexpected risks when trading, is to simply not be in a
stock that is about to give off an earnings announcements. These announcements come
out every 3 months or so and can really move the price of the stock (in either direction).

So it can be a good idea to avoid being in during these times. There will always be
positions out there that you can take without having to worry about earnings.

49

Conclusion

Different individuals will have different tolerances for risk. Tolerance is not static, it
will change as your life does. As you grow older tolerance will usually shrink as
more and more obligations come up, including retirement.

There are several different types of risks involved in financial transactions. I
hope we've helped shed some light on these risks. Achieving the right balance
between risk and return will ensure that you achieve your financial goals while
allowing you to get a good night's rest.

Diversification helps to diversify away unsystematic risk. When the investor has more
than thirty stocks in his portfolio, and all the stocks come from different sectors, he
has diversified away the unsystematic risk. Anything happens to one company is not
likely to wipe out his entire portfolio.

Many bank regulatory actions have been double-edged, if not counterproductive.
With regard to systemic risk, circumstances may exist in which complete
reliance cannot be placed on private ordering; however, excessive reliance on
deposit insurance and other government safety-net measures, even if well
intentioned, has been very costly. Our purpose in this article has been to
emphasize some of those costs and to urge bank regulators to be more sensitive
than they often have been to how their actions can impair private-market
incentives and thus reduce the benefits of their actions. Indeed, we suggest a
deliberate strategy of seeking to minimize the scope of the government’s backup
role and to maximize the effectiveness of private actors as the first line of
defense against systemic risk. That approach was not much in evidence through
the latter two-thirds of the twentieth century. It is not possible either
theoretically or empirically to draw up a comprehensive balance sheet of all the
benefits and costs produced by bank regulation and intervention over that
period, but, in our own view, it is arguable that the costs outweighed the
benefits, and the regulators may well have contributed to systemic risk as much
as they retarded it. We hope that a new strategy that reduces potentially
counterproductive government policies will play a larger role in the twenty-first
century.

50

Bibliography

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9.Mr. Rahul Garg; Investment Management Group; Fidelity Investments
10.Articles from internet.

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