Question

Discuss systematic and unsystematic risk. Why is systematic risk considered to be relevant risk?

Answer 1

Systematic risks are risks which affect the entire economy or all industries. This risk cannot be mitigated. Beta of a firm represents the systematic risk of company. The CAPM model is based on systematic risk.Example Interest rate change , INflation, GDP ,etc

Unsystematic risk are company specific or industry specific risk which can be diversified.
It can reduced or mitigated by investing in negatively correlated stocks.This will help in diversifying the risks.Example: Strikes ; Lock down in a company,etc.

Systematic Risk is relevant risk because unlike unsystematic risk it cannot be diversified away. The market provides return only on basis of systematic risk and not on unsystematic as it can be diversified away.Investors worry only about systematic risk while investing in portfolio.