How do you reduce the systematic risk

Systematic risk

Systematic risk is also known as market risk and is due to factors that affect all securities equally.

The causes of the risk can be general inflation, political events or natural disasters. In contrast to unsystematic risk, systematic risk cannot be reduced through diversification. The inevitable risk of investing in stocks is therefore systematic risk. It is therefore particularly important for an investor to identify this type of risk. The quantity that indicates the degree of dependence of an investment on the systematic risk is called the beta factor. It indicates the extent to which a share reproduces market movements, measured, for example, on a share index. The higher the beta factor, the more the stock reacts to changes in the stock index.

According to capital market theory, the overall risk associated with an investment is broken down into systematic and unsystematic (partial) risks. The systematic risk of a capital market investment is that part of the overall risk whose fundamental causes lie in the investment group (e.g. German bonds). The causes of risk can then e.g. B. derived from changes in interest rates, inflation, political events, natural disasters.

Every investment in securities poses a specific risk with regard to the diversification of returns. Part of this risk, the unsystematic risk, can be avoided through efficient diversification with other securities investments. The remaining residual risk is the systematic risk. The systematic risk thus measures the risk that cannot be avoided even through an efficient mix with other securities.

The systematic risk is used to determine the return on a security. On a capital market that is in equilibrium, the expected value of the return on a security consists of the risk-free market interest rate and a risk premium. This risk premium is calculated from the market price for the assumption of risk, which is multiplied by the systematic risk.

See also: Modigliani-Miller theorem, Tobin separation

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