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Difference between Systematic and Unsystematic Risk

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Difference between Systematic and Unsystematic Risk

Difference Between Systematic and Unsystematic Risk. Before identifying the differences between systematic risk and unsystematic, we should have clear understanding about these mentioned terminologies. However, they are defined as below:

Systematic risk

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 as market risk. Also can be mentioned  as volatility, it consists of the day-to-day fluctuations in a stock’s price.

Unsystematic risk

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,” is the type of uncertainty . Unsystematic risk can be reduced as well as controlled through diversification.

 

 

 

Difference Between Systematic and Unsystematic Risk
Fig. : Types of Risk in Finance

Now, The major differences between Systematic and Unsystematic Risk can be summarized below:

Systematic risk

Unsystematic risk

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 through making portfolio of assts. ii. It can be diversified through making 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 business phenomenon.
v. It is termed as common risk. v. It is termed as unique risk.
vi. It is measured by the movement of individual securities with the changes in the market. vi. Unique risk of the 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.

 

 

 

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Difference Between Systematic and Unsystematic Risk
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Difference Between Systematic and Unsystematic Risk
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Difference Between Systematic and Unsystematic Risk. Before identifying the differences between systematic risk and unsystematic, we should have clear understanding about these mentioned terminologies.
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