Systematic and unsystematic risks

Sample Solution

    Systematic risk is a type of risk that affects all investments in the same sector or market and cannot be diversified away. Systematic risks include political, economic, and industry specific events that can cause expected returns to deviate from what was predicted. Common examples of systematic risks are inflation, recessions, exchange rate fluctuations, wars etc.  

Unsystematic risk is specific to particular investments or sectors and may be caused by factors such as management decisions or changes in technology. Common examples of unsystematic risks are individual company bankruptcies, labour strikes or lawsuits against a company etc. In order to create a plan to address these types of risk businesses will need to assess their current level of exposure taking into account both the potential upside and downside scenarios. For example, if a business operates within an industry where there is significant exposure to inflation then they should consider strategies to protect them from this type of systematic risk such as hedging foreign currency exchange rates or entering into forward contracts with suppliers for materials at fixed prices over the long term. The plan should also take into account potential unsystematic risks which could have an impact on the business’ operations and finances. Unsystematic risks can include things like labor disputes, legal issues or technological advances in competitors’ products which make their own product obsolete; therefore it is important for businesses to develop contingency plans for how they would respond if one of these events occurred. The actions taken might include measures such as enhancing security systems at premises where employees work or investing resources into research and development activities so that new technologies can be developed quickly before others overtake them in terms of quality/price advantages etc.. Finally it is important for businesses not only take steps to mitigate existing sources of risk but also look ahead so that emerging trends can be identified early on giving them time to adapt accordingly before any real damage occurs due too late action being taken after the event has already happened. This includes monitoring developments within industries related theirs (e.g., customer preferences/demand), tracking legislation/regulatory change impacting their sector (e.g., environmental laws) , keeping up with global political events (e.g., trade agreements) amongst other things relevant depending on each business context respectively . By implementing these proactive measures companies should find themselves well placed when faced with either kind of systemic/unsystemic risk going forward meaning they avoid costly mistakes often made when reacting rather than planning ahead appropriately beforehand