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What are two types of risk that an investor is exposed to when she is investing...

What are two types of risk that an investor is exposed to when she is investing in common stocks, and what's the difference between these two types of risks?

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Answer #1

The two types of risk that an investor is exposed when she invests in common stocks are:

  1. Systematic Risk
  2. Unsystematic Risk

Systematic risk is also called the market risk, that affects all the industries in the market. Examples include, raise in interest rates, geo political risk, natural disaster, virus pandemic, etc. These risks cannot be diversified by holding uncorrelated stock in the portfolio.

Unsystematic risk are risks specific to a firm. Examples include the CEO of the company resigning without notice, FDA rejecting a new drug approval, misrepresentation of the financial statements, etc. These risks can be diversified by holding many stocks in the portfolio.

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