Finance - Essay Example

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Finance

Contrast Systematic and Unsystematic Risk Systematic risks are the risks which are generated by various market factors. Usually investors do not possess any control over these factors. Such risks are non-diversifiable in nature. They may happen due to some ‘non-probabilistic events’ (Condamin, Louisot & Naim, 2006). Interest rates, wars and recession are some of the important sources of this kind of risk as they are capable of affecting the whole market. In general, systematic risks cannot be insured. On the other hand, unsystematic risk is the risk that is found to be in association with the organizations’ operations and their ways of running business. Since, such risk is industry or company specific, it can be reduced by proper diversification. In other words, such risk is diversifiable in nature (Condamin, Louisot & Naim, 2006). Explain why the total risk of a portfolio is not simply equal to the weighted average of the risks of the securities in the portfolio The total risk of a particular portfolio can be measured as variance of the return of that portfolio. A portfolio’s risk is not equal to weighted average of the risks of each and every security rather it is the combination of weighted average of the risks of each and every securities and the weighted average of risks that are market related (Kevin, 2006). It can be expressed by the following equation [Source: Kevin, S. ...
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Finance and Accounting Identify the Components of a Stock’s Realized Return The realized return of a stock is consisted of two major components which are i) dividend and ii) capital gain or loss (Navarro, 2005). Dividend is referred to a portion of the earnings of a company…
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