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Critically evaluate the statement that the objective of portfolio investment is to minimise risk with examples, and discuss the differences between systematic and unsystematic risk - Essay Example

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In fact it is said greater is the risk greater the associated return is. However the investor wants to minimize the risk that is associated with any investment. Out of the risk that is associated with any…
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Critically evaluate the statement that the objective of portfolio investment is to minimise risk with examples, and discuss the differences between systematic and unsystematic risk
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Extract of sample "Critically evaluate the statement that the objective of portfolio investment is to minimise risk with examples, and discuss the differences between systematic and unsystematic risk"

Download file to see previous pages Unsystematic risk on the other hand is specific to a particular industry and can only b controlled through proper diversification or portfolio management strategy. The following pages describes the two types of risks and critically analyzes the statement that objective of portfolio diversification is to minimize risk.
Systematic risks are the macro risk and affect all sectors and all industries in a market (Back, 2010). This risk cannot be minimized by an investor through portfolio diversification. From the company’s view point this risk cannot be controlled by the company. This type of risk is both unavoidable and impossible to predict (An, 2007). Such type of risk is impossible for the company to control. Another type of risk is the unsystematic risk.
Systematic risks are the risks that arise due to the influence of external factors that are beyond the control of an organization (Chance and Brooks, 2015). Since these types of risks are beyond the control of an organization so these risks do not affect a particular organization but affects all types of organization that are present in the market. The organization cannot plan in advance for such type of risks. Such types of risks are macro in nature and have its impact across the market spectrum irrespective of the industry or sector types (Fouque and Langsam, 2013). The systematic risks can be of various types and can be further subdivided into Interest rate risks, Purchasing power risk and Market risk.
Interest rate risk: Interest rate risk is mainly associated with debt instruments and refers to the variability of interest rates from time to time. Interest rate risks can be further subdivided into price risk and reinvestment rate risk (Gai, 2013). Price risk as the name suggests is the risk that is associated with the probable fall in the price of shares or any other commodity in the future. Reinvestment risk is the risk that is ...Download file to see next pagesRead More
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