Difference between Systematic and Unsystematic Risk
Difference Between Systematic and Unsystematic Risk. Before identifying the differences between systematic risk and unsystematic, we should have a clear understanding of these mentioned terminologies. However, they are defined as below:
Non-diversifiable risk is called systematic risk. It is the portion of total risk which can not be eliminated, controlled through diversification of assets. Systematic risk some time called market risk. Also can be mentioned as volatility, it consists of the day-to-day fluctuations in a stock’s price.
Diversifiable risk is called unsystematic risk. It is that portion of total risk which can be eliminated, controlled through diversification of assets. Unsystematic risk also can be highlighted as “specific risk,” “diversifiable risk” or “residual risk,” which is the type of uncertainty. Unsystematic risk can be reduced as well as controlled through diversification.
Now, The major differences between Systematic and Unsystematic Risk can be summarized below:
|i.||Systematic risk relates to market risk affecting all the securities in the market.||i.||Unsystematic risk does relate to market risk.|
|ii.||It can not be diversified away by making a portfolio of assets.||ii.||It can be diversified through making the portfolio of assets.|
|iii.||It is related to market-wide factors.||iii.||It is related to business-specific factors.|
|iv.||It arises due to economic uncertainty||iv.||It arises due to a business phenomenon.|
|v.||It is termed as a common risk.||v.||It is termed as a unique risk.|
|vi.||It is measured by the movement of individual securities with the changes in the market.||vi.||The unique risk of individual securities can totally be eliminated by putting them in a group.|
|vii.||Security’s beta is the standardized measure of systematic risk.||vii.||Unsystematic risk is total risk minus systematic risk.|