Module: Financial Instruments and

Markets
Topic: Scope of the Course

Dr. Muhammad Husnain Kamboh

Assistant Professor,
Department of Business Administration

Week 1

Ch 1 -1
Lecturer Objectives

This lecture helps to:

■Understand the global economic system

■Understand the Rational behind the existence

of market
■Examine the risk and its types
■Measure different types of risk

Ch 1 -2
Global Economic System

Ch 1 -3
Global Economic System

■ Main Sector
❑ House Hold Sector
❑ Business Sector
■ Markets in Economic Systems
❑ Factor Market
❑ Product market
❑ Financial Market
Ch 1 -4
Rational Behind Market

Suppose a 5 Individuals
Economy
Excess Business
Individuals
Goods Trip
A Apple 4
B Cotton 3
C Water 2
D Gold 1
E Wheat 0
Total 10

Due to Markets, economy only need to bear the cost for 5 Business Trips

Ch 1 -5
Types of Financial Markets

Ch 1 -6
Types of Financial Markets

Ch 1 -7
 Risk and Its Types
✔Risk
✔ It is defined as uncertainty about future unfavorable outcomes.
✔ It is the probability of loss
✔ Probability that actual return may different from expected return
✔Types of Risk
✔ The risk may be categorize as Systematic risk and unsystematic
risk

Ch 1 -8
Measure of Risk

Ch 1 -9
Risk and Its Types

■ Systematic Risk
❑ Risk which is common to an entire market because of
the economic changes or other events that impacts
large portion of the market. For example a significant
political event may affect several securities.
❑ This risk is based on macro economic variables so no
individual business can have control over it.
❑ Therefore it is unavoidable, uncontrollable and
undiversifiable
❑ Since this risk cannot be eliminated through
diversification, this is often called non diversifiable risk.
Ch 1 -10
 Risk and Its Types

■ Unsystematic Risk
■ It is company or industry specific risk that is inherent in each
investment. It is also known as diversifiable, avoidable,
controllable and specific risk.
■ Volatility due to firm-specific events
■ Can be eliminated through diversification
■ Also called firm-specific risk and diversifiable risk
■ An investor can only reduce unsystematic risk. This can be
done by spreading investments over a number of different
assets
■ REDUCING UNSYSTEMATIC RISK THROUGH
DIVERSIFICATION
Ch 1 -11
 Assignment No 1

■ Explain the Types of Risk

Ch 1 -12
Any Question &

Many Thanks

Ch 1 -13