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)
