What is systematic risk vs. nonsystematic risk? Should both of these risks be compensated with higher...
What is systematic risk vs. nonsystematic risk? Should both of these risks be compensated with higher returns? Why or Why not?
Homework Answers
Systematic risk is the risk associated with the entire market or the segment. It is also known as non-diversifiable risk, market risk, etc. An investor cannot reduce his systematic risk by diversifying his portfolio. To see more: https://www.investopedia.com/terms/s/systematicrisk.asp
Non-systematic risk is the risk associated with a specific industry, segment or a specific company's security. It is also called diversifiable risk, residual risk, specific risk, etc. An investor can reduce the unsystematic risk of his portfolio by diversifying the portfolio. To see more: https://www.investopedia.com/terms/u/unsystematicrisk.asp
Systematic risk should not be compensated with higher returns, but Non-systematic risk should be compensated with higher returns because the investor is suffering a higher risk merely for choosing a particular security, while this is not so for Systematic risk.
Hope this helps.
Feel free to ask for clarifications.
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Thank you!
Systematic risk is the risk associated with the entire market or the segment. It is also known as non-diversifiable risk, market risk, etc. An investor cannot reduce his systematic risk by diversifying his portfolio. To see more: https://www.investopedia.com/terms/s/systematicrisk.asp
Non-systematic risk is the risk associated with a specific industry, segment or a specific company's security. It is also called diversifiable risk, residual risk, specific risk, etc. An investor can reduce the unsystematic risk of his portfolio by diversifying the portfolio. To see more: https://www.investopedia.com/terms/u/unsystematicrisk.asp
Systematic risk should not be compensated with higher returns, but Non-systematic risk should be compensated with higher returns because the investor is suffering a higher risk merely for choosing a particular security, while this is not so for Systematic risk.
Hope this helps.
Feel free to ask for clarifications.
Please leave a thumbs up.
Thank you!
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