The paper "Systematic and Unsystematic Risks" is a perfect example of a finance and accounting assignment. Risk in finance occurs when investors are faced with uncertainty in relation to the returns of their investments. An investor must ensure that a balance exists between the risk and returns in order to avoid financial loss. Maheshwari (2008) notes that all investors desire to maximize their returns while at the same time they aim at minimizing the risks that are associated with their investments. The investor must identify the appropriate techniques to utilize so as to manage the risks associated with their investments.
The fact that some investments are riskier than others require the investors to measure the risk associated with their investments in order to determine the minimum expected returns. Moreover, the investors must come up with methods of minimizing their risks. Therefore, this paper is going to identify the methods used by investors to analyze and manage systematic and unsystematic risks. In addition, the paper will show how systematic and unsystematic risks affect share prices. 2.0 Systematic and unsystematic Risks According to Moyer, McGuigan and Kretlow (2008), systematic risk refers to that risk that cannot be diversified.
Systematic risk occurs due to the variability of a portion of a security returns and this is caused by factors that affect the market as a whole and thus the risk is non-diversifiable. The factors include changes in interest rates, changes in the performance of the economy and changes in the purchasing power as a result of inflation. On the other hand, unsystematic risk refers to that risk that the investor can reduce through diversification.
Unsystematic risk can be caused by factors like strikes, management competencies, and competition. 3.0 Methods of analyzing systematic and Unsystematic Risk Systematic risk is of high importance to an investor because it cannot be reduced through diversification (Periasamy, 2009). Investors in the share markets measure the systematic risk before they make their investment decisions.
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