Systematic vs. unsystematic risk

Systematic risk and examples

Risk that can't be eliminated through diversification 1. purchasing power risk 2. reinvestment risk 3. interest rate risk 4. market risk 5. exchange rate risk

default risk

risk that a company can't repay its debt obligations

reinvestment risk

risk that an investor will not be able to reinvest income received from current investments at the same rate as the current investment rate

business risk

risk of conducting business within an industry

country risk

risk of political and economic stability/instability for a country that a company faces

executive risk

risk or moral character of the executives running a company (extent to which executives break laws, regulations, or ethical standards)

government/regulation risk

risk that a country may pass a law/regulation that impacts a particular industry

market risk

risk that a short-term, daily fluctuations in the market tend to bring all securities in the same direction

Unsystematic risk and examples

risk that can be mitigated/eliminated through diversification 1. business risk 2. country risk 3. default risk 4. executive risk 5. financial risk 6. government/regulation risk

interest rate risk

risk that changing interest rates will inversely impact equities and bonds (as interest rates decreases, price of equities and bonds increases)

purchasing power risk

risk that inflation will cause prices to increase and the dollar will not be able to buy the same amount of goods and services in the future

exchange rate risk

risk that the relationship between the price of a dollar and foreign currency changes

financial risk

the amount of leverage the company is using in its capital structure (leverage = measure of the amount of debt a company uses to capitalize the business)