Answer to Question #65746 in Finance for Abdul

Question

The CAPM difference between systematic and unsystematic risks explains each type and clearly explains what cause each type of risk.

Answer 1

Systematic risks arise from macroeconomic or market segment factor. Such risks are uncontrollable and non-reducible through diversification. Sources of systematic risk may be related to economic growth, interest rate, inflation, social and political situation or even natural disaster etc.

Unsystematic risks are specific to particular company or industry. They can be eliminated through portfolio diversification. Such risks may be caused by production constrains, increased competition, change in consumer taste or technologies, ineffective capital structure etc.