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Systematic Risk vs Unsystematic Risk | Top Differences You Must Know! - YouTube
Channel: WallStreetMojo
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welcome everyone
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and today's topic is systemic risk vs.
unsystematic risk which is a part of the
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evaluations evaluations 22 for
various companies in terms of what we
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call as discounted cash flow techniques
or any other sort of techniques where
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such beta is used so what exactly is the
difference is what we are here to learn
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unsystematic we'll start with the
unsystematic risk this is the risk that
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is the degree of the uncertainty in any
stage of life for instance while
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crossing the road there is always a risk
of getting a hit by vacant the
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precautionary measures are not
undertaken similarly in the area of the
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investment and finance and various other
risk exists and since the hard-earned
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money of the individuals in forms I
invoked in the cycle so in this tutorial
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we will be focusing on the difference
between the systemic and the
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unsystematic risk now these risks are
inevitable in any kind of the financial
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decisions according and one should be
equipped to handle them in case of any
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the the occur further okay we'll start
with systemic risk the systemic risk the
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does not have any specific
definition but it it is inherent risk
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existing in the stock market these risks
are applicable to all the sectors but
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can be controlled so if there is an
announcement or even or in an event
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which impacts the entire stock market a
consistent reaction will flow in which
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the systemic risk will work like for
example if the government bonds let's
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talk about government bonds homely here
let's say if the government bonds is
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offering the yield of 5% in
comparison to the stock market which
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offers a closely around let's say 10%
let's take this percentage then
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suddenly the government announces an
additional tax burden of let's say
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closely around 1% on the stock
market's transaction so this will be a
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systemic risk impacting all the stocks
and may take the government bonds more
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attractive what is unsystematic risk so
we are talking about this kind of risk
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it is an industry or firm specific
threat in each kind of investment so it
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is also known as the specific risk or it
is also known as the diversifiable risk
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or residual risk so these are the risk
which are existing but are unplanned and
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occur at any point in casualty
widespread disruption for example if the
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staff of the airline industry goes in on
an indefinite strike then this will
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cause a risk of to share of the airline
industry in falling price of the stock
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impacting the industry so one should
keep in mind the formula something like
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this the total risk is equal to your SR
that is your systemic risk and your
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unsystematic USR
risk see the about cannot be avoided but the
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impact and we are limited with the help
of the diversification of the shares
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into different sectors for balancing the
negative effects let's understand this
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with the help of the infographics to
have a detailed eye view on this we
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start with the meaning systemic risk
risk or threat associated with the
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market the segment as a whole while us
are is the hazard associated with this
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specific security form or industry how
is the impact on the large number of the
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securities in the market SR and us are
restricted to the specific company in
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terms of the specific exposure
controllability cannot be controlled
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this can be controlled with the help of
the diversify diversify ability hedging
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diversification the portfolio will do
the hedging and here allocation of
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assets will help us to do the hedging
one of the types interest risk market
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risk and here the financial in the
business specific risk that is
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controllable or other responsible
factors internal can be controlled
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external is difficult to control this
cannot be avoided so this something that
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you have to bear this can be avoided so
it can be resolved with a quicker pace
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so let me make you understand what is
the systemic risk and though this is the
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risk that highlights the possibility of
the collapse of the entire financial
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system or the stock market causing a
catastrophic impact on the entire system
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in the country so it refers to the risk
cost by the financial system
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instability or potentially catastrophic
or idiosyncratic events to the
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Interlaken inter-linkages
interdependencies in the overall market
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so let us consider some example to
clearly understand this let's say
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there's a guy called Mr. A okay what
does Mr. A does Mr. A has made a
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portfolio consider constituting 500
shares of a media company and the 500
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corporate bonds the 500 government 500
shares this is share part 500 CB cop
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bonds just writing 500 again you he he
possess 500 as the governments bonds okay a
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recent interest let's say recent
interest cut has been announced by the
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central bank you to which Me.A wants to
reconsider the impact on his portfolio
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and how he can rework around it so given
the beta of the portfolio on let's say 2
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let's consider it as - okay it is
assumed the portfolio will return in
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fluctuating two times more than the
market returns so if the market spikes
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up by 3% a portfolio will increase by 3
into 2% that's 6 so on the other
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hand if the market Falls by 3% the
overall portfolio will decrease by 6%
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person right so according to Mr. a
have to lower the exposure of the stocks
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perhaps increase the what we call as the
asset allocation right so asset
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allocation will be a primary thing here
so the asset allocation can be
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considered as 250 of media firm you can
consider as 250 here 500 corporate bonds
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as it is and 750 as government bonds so
this may seem to be defensive mode but
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municipal bonds and perhaps the most
secure in terms of the default offering
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stable structure so generally the
investors who are risk averse will
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probably prefer a portfolio or a beta
less than 1 so that they may incur lower
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losses in case of these top market
decline on the other hand the
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risk-takers will prefer securities okay
securities with the higher betas aiming
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for the high return now source these
kind of systemic risks what can be the
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possible sources for this let's try and
understand this there may be political
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source or the political instability or
the government decision having
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widespread impact or probably a economic
crash
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and recession changes in taxation laws
can be again one of the reason a natural
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disaster this also can be one foreign
investment policy this also can be one
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of the reason so systemic risks are
difficult and to be to be medicated
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since they are inherent in the nature
and not necessarily controlled by the
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individual or a group so there is no
well-defined method for handling such
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risks but as an investor one can
consider their versification into
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various securities to perhaps reduce the
impact of the idiosyncratic
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situations they are causing a ripple
effect to such risk Oh what about the USR
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well also known as the diversifiable
of the non systemic risk it is a threat
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related to a specific security or the
portfolio of the security so investors
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constructs these diversify ability
portfolio for allocating risk or the
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various classes of the assets let us
consider an example to clear this
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understanding let's say on March 2016
Matthew invests 50,000 in
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diversifiable portfolio which investor
50% in stocks let's say 50% in stocks
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20% in the IT industry and balance let's
say of the 30% okay in the stock
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of the airline industry or the airline
companies so on February 28 let's the
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value of the portfolio is enhanced to
$57,500 and
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thereby bringing the growth of $57,500 - $50,000
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*100 which he comes
around 15% as the boat so
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one fine day he gets know that one of
the airline company has defaulted on the
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employee salary to payments due to which
the employees are on the strike and the
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other Airline is expected to follow the
same tactic so the investors worried and
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he says one option to be consider is mr.
Matthew is to either hold on the
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investments with the expectation on the
issue getting resolved or he can die
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with those funds to other sectors
experiencing stability or maybe divert
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them in he bond investments so some of
the other examples of the unsystematic
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risks are you
a change in the regulation impacting one
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industry the entry of let's say a new
competitor a form forced to recall one
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of its products are that also can be one
you know for example Galaxy Note 7
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phone was recalled by Samsung due of the
battery turning flammable so a company
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exposed to have made fraudulent activity
with the financial statements can also
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like you know for such him computers
funding their balance sheets and employ
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in the union tactic for the senior
management to meet the demands so the
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existence of the unsystematic risk means
the owner of a company security is at
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the risk of the it was as changes in the
value of those securities due to risks
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caused by organizations and the
diversification is one of the option to
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reduce the impact but will still remain
the subject one systemic risk that
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impacts the market is whole so more is
the diversification lower will be the
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residual risks in the overall position
so unsystematic risk is the it has
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measured and managed through the
implementation of various risk
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management tools well including the
derivative market investors can be aware
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of such risk mod various known unknown
types of the risk can crop up at any
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time when thereby increasing the level
of the answer well apart from this i
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think what we are over here to discuss
is few the important points of SR and USR
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well let us understand see systemic
risk is the probability of a loss
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associated with the entire market of the
segment whereas the unsystematic risk is
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associated with the specific industry or
the segment okay systemic risk is
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controllable okay and this is not
controllable systemic risk is
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uncontrollable and this is a
controllable risk which is restricted in a
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particular section so unsystematic risk
are caused due to the internal factors
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that can be controlled or reduce in a
relatively short span of time systemic
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risks affects the large number of
companies or systemic large number of
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securities in the market due to
impact and such interest rate decreases
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by the central bank of the country
whereas on systemic risk affected by the
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stock or securities of a particular form
or a sector example strike caused by
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workers
systemic risk is divided into 3
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categories interest rate purchasing
power parity theory or market risk can
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be in all the direction while
unsystematic risk is bifurcated into
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only two part business risk and the
financial risks well after all of this
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let me will finally make my conclusion
any kind of investment will have an
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inherent risk associated with it which
cannot be awarded systemic risk and
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systemic risk may be both highlight
these factors which have to be accepted
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while making any kind of investments so
these risks do not have any specific
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definition but it will be part of any
kind of financial investment through
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both the systematic and unsystematic
risk this type of risk cannot be
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completely avoided investor needs to be
vigilant periodically rebalance their
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portfolio diversify the investment so
that if any catastrophic events takes
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place the investor can be less impacted
in case of the adverse events but also
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maximize the gain in case of the
positive announcements that's it for
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this particular topic if you have
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