Concept of Risk All investments are risky, whether in stock

and capital market or banking and financial

sector, real estate, bullion, gold, etc. The degree of risk however varies on the

basis of the features other assets,

investment instruments, the mode of

Investment Even the so called riskless assets like- bank

deposits carry some cost and time in

realisation of proceeds or in conversion into cash

RISK IN FINANCE

SYSTEMATIC RISK(Non-

diversifiable)

UNSYSTEMATIC RISK

(Diversifiable)

Can Diversification reduce all the risk of securities?

We just explained when two or more securities are included in a portfolio, the risk of individual securities in the portfolio is reduced.

This risk totally vanishes when the number of securities is very large.

While systematic risk is common to all

companies and has to be borne by

investor and compensated by the risk

premium,

Whereas the unsystematic risk can be

reduced by the investor through proper

diversification and planning a proper

investment strategy for the purpose.

Systematic Risk:- It is arise on account of the economy-wide

uncertainties and the tendency of

individual securities to move together

with changes in the market. It is also known as market risk. It is arise out of external and uncontrollable

factors, arising out of the market, nature of the industry and state of economy and host of other factors.

These risk cannot be uncontrollable.

Examples of systematic risk Market risk:-

This arise out of changes in demand & supply pressures in the market.

The totality of investor perception and subjective factors influence the events in the market which are unpredictable and not controllable.

Interest Rate Risk:-

The return on investment depends on the interest rate promised on it and changes in market rates of interest from time to time.

This interest rates depends on nature of instrument, stocks, bonds, etc. maturity of the periods and creditworthiness of the issuer security.

Purchasing power risk:-

Inflation or rise in prices lead to rise in cost of production, lower margins, wage rise etc.

The return expected by investor will change due to change in real value of returns.

Some other example of systematic risk includes:-

The government changes the interest rate policy.

The inflation rate increases. The RBI promulgates a restrictive credit

policy. The government relaxes the foreign

exchange controls and announces full convertibility of Indian rupee.

The government withdraw tax on dividend payments by companies.

Unsystematic Risk:-

It is arise from unique uncertainties of individual securities. These uncertainties are diversified if a large numbers of securities are combined to form well-diversified portfolios.

It is also known as unique risk. It is arise out of known and controllable

factors, internal to the issuer of the securities or companies.

These risk can be controllable.

Examples of unsystematic risk:-

Business Risk:-This relates to the variability of the business,

sales, income, profits etc. which in turn

depend on market condition for product mix

This risk sometime external to the company

due to changes in government policy, of

strategies of competitor.

Financial Risk:-

This relates to method of financing, adopted by

Company, delayed receivables and fall in current

assets

Insolvency Risk:-

The borrower may become insolvent or may

default, or delay the payments due, such as

interest instalments or principal repayments.

Borrower’s credit rating might have fallen

suddenly and he bacame insolvent

In such cases, the investor may get no return

or negative return.

Some other example of unsystematic risk includes-

The company workers declare strike . The R & D expert leaves the company. The company loses a big contract in a

bid. The company makes a break through in

process innovation. The company is unable to obtain

adequate quantity of raw material.