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Systematic Risk examples & management

Systematic risk

Systematic risk is also known as market risk or which comes within complete system as like in stock market by which all the linked companies will be affected and direct and indirect partners also. Also, no one can diversify the systematic risk but only wait to fix is issue in complete system. The most common example of Systematic risk is stock market crash. So no one can heal the issue in Stock market crash but only can wait for the recovery.

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As we all know that stock market is volatile in behaviours and full of uncertainties. And that’s why complete market will be affected due to systematic risk.

Why is Systematic risk important?

The volatile behaviour of Stock market is only the reason of money making reason behind stocks and bonds here. Because due to this ups and downs in the stock prices, people makes money and it gives competition and uncertain moments that share prices goes high or low. And when prices go down and down below the depth level then market crashes. And no one can control this.

If there is no volatility in stock market, then your share prices will not go up and not down. So no money will be form in that way. So the movement in stock’s rates is must require to run the stock exchange and get profit.

As like in Unsystematic risk, you can’t manage the effects of this risk with proper portfolio in this risk.

Causes of Systematic Risk

There are a number of reason behind systematic risk that crashes the complete market and few examples are Interest rates, Recession, Wars.

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If interest rates are changed then no company can control it but only to accept the new rates and implement them. So, interest rates are a cause of systematic risk. When country’s economy goes in recession then you can see big fluctuations in the stock prices that is also systematic risk because no one can control them.

Systematic Risk

Third big factor behind this risk is Wars, because if your country is in war against another country, then again big ups and downs in stock market can be seen and also out of control.

Systematic Risk management

As earlier mentioned, systematic risk can’t be removed by yourself but can only be migrated. There are few option by following them you can make yourself safe at the time of systematic risk. And can manage the effects.

  • If there is inflation in the market, then best thing is to invest in securities in inflation-resistant economic sector.
  • In a condition like high interest rate, then you can sell your shares and then you also have options to buy new issued utility shares.
  • If you see a condition like economy recession, then you should have to shift your investment in suitable sectors which you feel can bear the effects of economy recession like defensive industry stocks and bearish options strategies.

How to calculate Systematic Risk

Beta method is used to measure the systematic risk and movements in the rates of stock market. Beta compares your portfolio against the market for risk cases. In other words, Beta gives you comparison records or stats about a single stock rates and the complete stock market risk.

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Capital Asset Pricing Model or CAPM is created to get the graph risk and this model formed with the help of Beta method with regressive analysis.

There are various kind of swings in market and Beta analysis to calculate Systematic risk gives tendency of a security’s returns.

  1. If your Beta value is 1 then your security price will move along with market and in this case, you will not find any much profile or loss from the investment.
  2. If Beta value is less than 1 then your security value is less volatile then the market and in this case, you will find minor movements in stock rates and also a minor profile or loss can be faced.
  3. But if Beta value is more than 1 then it means security price is more volatile than market and it gives huge changes in prices and might see big profile or big loss.

For example, most of the Utility stocks have less than 1 beta so their movement of prices will not go much. And they don’t give much profit and not much loss. And on the other hand, most of Nasdaq stocks have beta higher than 1. So they have higher volatile behaviour in market and may give high profit rates or high loss.

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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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