Types of Risk….investors

There are two types of risk. What are these two types of risk and should investors be concerned about them? By what methods are these risks measured by analysts?

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Risk can be described as “possible future outcomes that we can describe in terms of their chances of occurrence, and what impact they would have on us,” (The fundamentals of risk, 2017). To tie this into finance, risk relates to material loss that is attached to the project which affects the productivity and tenure of the project. There are two types of risk: Systematic risk and unsystematic risk. Systematic risk is the risk of an investment asset that cannot be reduced or eliminated by adding that asset to a diversified investment, this is due to the influence of external factors. Types of systematic risk include: interest rate risk, market risk, and inflationary risk. This refers to risk that is inherent to the complete market, these risks are shared by all and are considered non-diversifiable. Systematic risk is associated with the behavior of investment rather than the reason for the market and alongside this, it also ads volatility and consists of daily fluctuation in the prices of stock (Risk Management for Enterprises and Individuals, n.d.). This is a reason why investors should concern themselves with systematic risk.
Beta is a common measure of risk that can measure the amount of systematic risk an individual security or an industrial sector has relative to the whole stock market (Risk Management for Enterprises and Individuals, n.d.). Unsystematic risk on the other hand are risk that are due to the influence of internal factors and can have their adverse consequences mitigated simply by having a well-diversified portfolio or risk exposures (Risk Management for Enterprises and Individuals, n.d.).This is known as diversifiable risk or residual risk and basically is the danger of an event that would affect the industry and not the market. Unsystematic risks are micro in nature, and analysist can use the method Value at Risk (VAR), which is a statistical measure to assess the level of risk associated with a portfolio or company to analyze unsystematic risk. Investors’ concern themselves with this type of risk because it can be found in all companies that investors may wish to invest in. There really is no such this as 0 risk, as everything comes with a price some way or another.

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