TYPES OF RISK

1. SYSTEMATIC RISK: The component of risk that

cannot be eliminated is known as systematic risk, and
represents the risk which cannot be forecasted,
predicted or controlled. probability of a loss associated
with the entire market or the segment

2. NON-SYSTEMATIC RISK: Which can be predicted, or

controlled. associated with a specific industry, segment
or security. ... Conversely, unsystematic risk can be
eliminated through diversification of portfolio.
 TYPES OF SYSTEMATIC RISKS
• INTEREST RATE RISK
Such kind of risk is the result of a change in the market interest
rate. It mainly impacts the fixed income securities
as bond prices are inversely related to the interest rate. This is
based on nature of securities, stock, maturity of the periods and
the credit worthiness of the issuer of securities.
• MARKET RISK
It is the result of the general tendency of the investors to move
with the market. So, it is basically the tendency of the security
prices to move collectively. For instance, in the falling market,
the stock price of even the best performing company’s drop.
Usually, market risk accounts for about two-thirds of total
systematic risk.
• PURCHASING POWER RISK:
inflation or rise in prices lead to rise in cost of production, lower
margins, wage rises and profit sqeezing etc. the return expected by
investors will change due to change in real value of returns. Cost
push inflation cause by rise in cost, due to wage rise, or rise in input
prices. Demand pull forces operates to increase prices due to
inadequate supplies and rising demand.

• EXCHANGE RATE RISK:

This risk stems from the uncertainty in the changes in the value of
the currencies. So, it affects only the companies doing foreign
exchange transaction, like export and import companies.

• POLITICAL RISK:
Such type of risk occurs primarily due to political instability in a
country or a region. For instance, if a country is at war, then the
companies operating there would be considered risky.
 TYPES OF UNYSTEMATIC RISK
• BUSINESS RISK: This relates to the variability of the
business, sales, income, profit etc, which in turn depend on
market condition for product mix, input supplies, strength
of competitors.
• FINANCIAL RISK: this relates to the method of financing,
adopted by company , high leverage lending to larger debt
servicing problems or short term liquidity problems.
• DEFAULT RISK : the borrower or issuer of securities may
become insolvent or may default , or delay the payments
due. The borrower credit rating might have fallen suddenly
and he became default prone or lead to insolvency. It may
lead to no return or negative return for investors.
 USING BETA TO SYSTEMATIC RISK
• Another name of systematic risk is volatility risk. And, we
can measure volatility in security by the sensitivity of a
security’s return with respect to the market return. This
sensitivity is captured by, which is calculated by regressing
a security’s return against the market return.
• So, a beta of stock tells how risky a particular stock or
portfolio is when we compare it to the market. Like, if the
calculated beta is zero, it means portfolio/stock is
uncorrelated to the market return; if beta is greater than
zero but less than one, it means portfolio/stock return has a
positive correlation with the market return, but the
volatility is lower; if beta is greater than one, then the
portfolio/stock has a positive correlation with the market,
but volatility is higher. In this case, if a stock’s beta is 1.2,
then it is 20% more volatile than the market.
• A beta of one means the portfolio/stock has a
perfect correlation with the market return; a beta
of less than zero suggests that the portfolio/stock
has an inverse correlation with the market return.
• Though it is impossible to avoid systematic risk,
its effect can be reduced by diversifying
investments. So, if one investment fails, then the
return from the others could help compensate for
it. Moreover, one can also lessen such risk by the
efficient use of resources and regularly updating
the portfolio based on the overall market
scenario.