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Q: Risk And Return - Corporate Finance ( Answered,   2 Comments )
Subject: Risk And Return - Corporate Finance
Category: Business and Money > Finance
Asked by: colville-ga
List Price: $60.00
Posted: 28 May 2006 12:48 PDT
Expires: 27 Jun 2006 12:48 PDT
Question ID: 733114
Discuss , can unsystematic riks or systematic risks be managed in the 
    corporate world with reference to RISK AND RETURN ?How can we
avoid systematic market ?
Subject: Re: Risk And Return - Corporate Finance
Answered By: wonko-ga on 09 Jun 2006 15:06 PDT
Investments have two components that create risk.  Risks specific to a
particular type of investment, company, or business are known as
unsystematic risks.  Unsystematic risks can be managed through
portfolio diversification, which consists of making investments in a
variety of companies and industries.  Diversification reduces
unsystematic risks because the prices of individual securities do not
move exactly together.  Increases in value and decreases in value of
different securities tend to cancel one another out, reducing
volatility.  Because unsystematic risk can be eliminated by use of a
diversified portfolio, investors are not compensated for this risk.

Systematic risks, also known as market risk, exist because there are
systemic risks within the economy that affect all businesses.  These
risks cause stocks to tend to move together, which is why investors
are exposed to them no matter how many different companies they own.

Investors who are unwilling to accept systematic risks have two
options.  First, they can opt for a risk-free investment, but they
will receive a lower level of return.  Higher returns are available to
investors who are willing to assume systematic risk.  However, they
must ensure that they are being adequately compensated for this risk. 
The Capital Asset Pricing Model theory formalizes this by stating that
companies desire their projects to have rates of return that exceed
the risk-free rate to compensate them for systematic risks and that
companies desire larger returns when systematic risks are greater.

The other alternative is to hedge against systematic risk by paying
another entity to assume that risk.  A perfect hedge can reduce risk
to nothing except for the costs of the hedge.

I have provided a number of sources that will assist you in furthering
your understanding of systematic and unsystematic risks, the
relationship of risk and return, and how to avoid systematic or market




"Principles of Corporate Finance" Fourth Edition by Brealey & Myers,
McGraw-Hill Inc. (1991) pages 137-139 and 916.

"Session 9: Capital Asset Pricing Model (CAPM)" The Malawi College of

"Hedge" (2006)

"Systematic Risk" (2006)

"Unsystematic Risk" (2006)

"Capital Asset Pricing Model" Wikipedia (May 30, 2006)

"Systemic Risk" Wikipedia (April 21, 2006)

"The risk and return relationship part 1: portfolio theory" by Patrick
Lynch (April 28, 2004)

"The risk and return relationship part 2: CAPM" by Patrick Lynch
(April 29, 2004)

Search terms: unsystematic risk systematic risk
Subject: Re: Risk And Return - Corporate Finance
From: ubiquity-ga on 30 May 2006 16:03 PDT
One avoids systematic risk by diversifying one's portfolio.

of course, a single firm can diversify by investing in several
different industries (become a conglomerate).  Then again, empirical
evidence suggests comglomerates are not as profitable as those which
are devoted to a single industry.

Assystematic risk is risk to a particular industry.  So, it depends on
the industry and the nature of those risks to determine whether thay
can be controlled.
Subject: Re: Risk And Return - Corporate Finance
From: thehumanoracle-ga on 24 Jun 2006 03:30 PDT
If you are still not sure the following link will direct you to a web
cast.  The lecturer is A. Damodaran, arguably one of the best
Corporate Finance Lecturers in the World.

Step 1. Open -
Step 2. Click -> Web Casts 
Step 3. Click -> Corporate Finance- Spring 2005 
Step 4. Click -> 4 (2/2/05)


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