Q1. Distinguish between ‘Systematic risk and ‘Unsystematic risk'. Describe how risk can be classified based on its sources.
Key Points:
- Systematic risk is non-diversifiable market risk affecting all securities (e.g., inflation, interest rates).
- Unsystematic risk is diversifiable specific risk unique to a company or industry (e.g., product recall).
- Diversification reduces unsystematic risk, leaving systematic risk as the unavoidable market exposure.
- Systematic risk is measured by Beta (β), indicating an asset's sensitivity to market movements.
Answer: In the realm of equity markets, understanding and classifying risk is paramount for informed investment decisions. Risk, broadly defined as the variability of actual returns from expected returns, can lead to both positive and negative deviations. For IGNOU's MMPF-007, a crucial distinction is made between ‘Systematic risk’ and ‘Unsystematic risk’, which form the two fundamental components of an investment’s total risk. ### Distinction between Systematic Risk and Unsystematic Risk **Systemati...