Understanding Systematic Risk
Systematic risk is the risk that affects us all, from geopolitical issues to our day-to-day lives. It is ever-present and can be caused by a combination of factors.Formula
β = Cov(Rx, Rm) / Var(Rm)How do I calculate the systematic risk?
In order to calculate Systematic risk, one can use the beta coefficient. This is calculated by regressing a security's return on market return. The beta coefficient is then used as a proxy for systematic risk. To calculate this in Sourcetable, use the formula: β = Cov(Rx, Rm) / Var(Rm), where Rx is the security's return and Rm is the market return.
What is Systematic risk?
Systematic risk is the risk of loss due to factors that affect the entire market, such as economic conditions, political events, or natural disasters. It includes market risk, interest rate risk, purchasing power risk, and exchange rate risk.
What is Purchasing power risk?
Purchasing power risk arises due to inflation and is the risk that the purchasing power of your investments will decrease over time due to rising prices.
Key Points
How do I calculate systematic risk?
β = Cov(Rx, Rm) / Var(Rm)
Systematic Risk is Unavoidable
Systematic risk is a type of market risk that is inherent to the entire market or market segment. It is the risk associated with the systematic factors that affect security prices across the entire market. Systematic risk cannot be eliminated through diversification.
Diversification Can Mitigate Unsystematic Risk
Unsystematic risk is a type of risk that is specific to a particular company or industry. This type of risk can be reduced through diversification, which is the process of investing in a variety of different types of securities in order to reduce the risk associated with any one security.
