Finance & Growth Strategies - Essay Example

The risk can be greatly reduced by holding diverse security portfolios of various industrial sectors. Good performance of other companies in the portfolio would negate the effect of bad performance of some of the companies. Since the risk is diversifiable investors would not be able to demand a premium on investment due to the unsystematic risk. Systematic, non-diversifiable, market or relevant risk is inherent in the market due to macro and economic factors such as interest and exchange rates, recession, inflation, consumer demand, oil prices, taxation and bear market (market where prices decline).

This risk cannot be diversified as the above mentioned factors influence the stock market and subsequently the market index. Investors who want high returns on investments should select assets with higher systematic risks while investors who want to eliminate risks should invest in risk-free assets such as government bonds. However, investors generally prefer higher rate of returns on investments in Public listed companies (PLC) rather than risk free assets to compensate for undertaking systematic risks.

Systematic risks are considered relevant as they can’t be successfully diversified. According to Anon, “Only the systematic risk is relevant for assessing the rate of return required by shareholders – efficient markets do not offer a reward for bearing specific risk” (2007a, p. 6.20). Though diversification is not a guarantee against loss it is a prudent strategy to achieve long term financial objectives. 1. b. According to the CAPM, Beta or financial elasticity and correlated relative volatility is a measure of systematic risk.

Systematic risk earns a risk premium and Beta is a calculated coefficient that indicates the amount of risk contributed by a security to the market portfolio. Beta, is determined by taking into consideration both dividend and capital appreciation. Beta is “…a measure of the responsiveness of the expected return on