Post a total of 3 substantive responses over 2 separate days for full participation. This includes your initial post and 2 replies to other students or your faculty member.
You are the Chief Risk Officer for a company and youve been tasked with identifying the areas where your company is exposed to systematic and unsystematic risks.
Respond to the following in a minimum of 175 words and citations for full credit:
- Based on the information you learned this week, what approach would you take in explaining how systematic and unsystematic risks affect risk planning?
- Describe your approach.
- Name 3 or more systematic or unsystematic risks your company might face.
- Think of some implications if your company decides not to be proactive and plan for these risks.
Good morning Dr. Haynes & Class,
This week’s subject was informative and provided clear illustrations of risks and how they impact institutions. Understanding how and why higher risk opportunities offer higher rates of return when compared to lower-risk investments that offer lower rates of return supports an everyday statement that many people live by, including me “big risks, reap big rewards. ” As explained by Brealey, Myers, & Marcus, 2020, systematic risk is also known as market risk and is defined as the risk that cannot be alleviated by diversification that can and will impact the entire economy. Factors that are outside of a companies’ control, such as natural disasters, weather events, interest rates, and inflation, are market risks (Brealey, Myers, & Marcus, 2020). Ironically unsystematic risks are defined as specific risks. Specific risks are events that affect only the individual firm or its immediate competitors (Brealey, Myers, & Marcus, 2020). Unsystematic risks are eliminated through a process known as diversification; this lessens the opportunities for risk. According to Cautero (2019), “strikes, mismanagement, or shortage of a necessary component in the manufacturing process all qualify as unsystematic risk.”
Brealey, R., Myers, S. C., Marcus, A. J. (2020). Fundamentals of corporate finance (10th ed). McGraw-Hill Education: New York, NY
Systematic risk refers to the fluctuations in the returns on securities that happen in the market. The factors can be as discussed in last weeks homework assignment, due to political, social or economic issues. They can be caused by natural disasters, changes in government policy or international or national economic factors. They are divided into 3 categories, Interest Risk, Inflation Risk and Market Risk.
Unsystematic Risk are things that businesses have control over. These are risks that a company can avoid with the correct planning and action. These can be the production of bad products (recalls), labor strikes. They are grouped into Business Risk and Financial Risks.
One way to protect against these is to diversify your holdings to mitigate how much risk you have in each category. There is no way to avoid systematic risks but you can diversify for example how much you have invested in overseas markets, in high categories.