Systematic Risk vs Unsystematic Risk

This video shows the difference between systematic risk (market risk) and unsystematic risk (firm-specific risk, diversifiable risk). Unsystematic risk results from events that have a unique effect on a firm's stock price (e.g., the CEO is fired) while systematic risk results from common shocks that affect all firms (the U.S. Federal Reserve decides to cut interest rates). When an investor chooses to invest in a portfolio of different stocks, the firm-specific risks average out (one firm has a good event, while another has a bad event); the volatility (a measure of total risk) of the portfolio declines as more firms are added. This process is known as diversification. Because investors can eliminate firm-specific risk through diversification, they do not require a risk premium for firm-specific risk. This leads to the conclusion that it is systematic risk which effectively determines the cost of equity capital for a firm. To measure a firm's sensitivity to systematic risk (market risk), we can examine a firm's beta. Once we know the beta, we can estimate the firm's cost of equity capital using the Capital Asset Pricing Model.
Edspira is your source for business and financial education. To view the entire video library for free, visit www.Edspira.com
To like us on Facebook, visit / edspira
Edspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael's life is to increase access to education so all people can achieve their dreams. To learn more about Michael's story, visit www.MichaelMcLaughlin.com
To follow Michael on Facebook, visit
/ prof.michael.mclaughlin
To follow Michael on Twitter, visit
/ prof_mclaughlin-
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
-
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
* eepurl.com/dIaa5z
-
SUPPORT EDSPIRA ON PATREON
* / prof_mclaughlin
-
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
* edspira.thinkific.com
-
LISTEN TO THE SCHEME PODCAST
* Apple Podcasts: podcasts.apple.com/us/podcast...
* Spotify: open.spotify.com/show/4WaNTqV...
* Website: www.edspira.com/podcast-2/
-
GET TAX TIPS ON TIKTOK
* / prof_mclaughlin
-
ACCESS INDEX OF VIDEOS
* www.edspira.com/index
-
CONNECT WITH EDSPIRA
* Facebook: / edspira
* Instagram: / edspiradotcom
* LinkedIn: / edspira
-
CONNECT WITH MICHAEL
* Twitter: / prof_mclaughlin
* LinkedIn: / prof-michael-mclaughlin
-
ABOUT EDSPIRA AND ITS CREATOR
* www.edspira.com/about/
* michaelmclaughlin.com

[@markbalahanov7327]

Awesome video , thanks!

[@alexko5852]

more fun than reading my text book... thanks 🤑

[@umarbuttar8059]

very well explained.

[@nandiniagarwal9040]

Brilliant! Thank you so so much

[@suchiswain8968]

thanks a lot sir..really helpful

[@veeeks6984]

Consider stock XYZ, it got bought out with a 44% premium, or it discovered oil and moved up 19%. As you say, buying many stock XYZ's will average out these gains/losses, that is diversify out these volatilities. But what if one wants these volatilities? They don't cost anything?

[@likeicare300]

God bless you

[@quachuonglilac]

nice explanation.

[@kentonwilson8702]

"...Amazon CEO involved in scandal." Lol from 2019, post Bezos affair. Definitely unsystematic.

[@nightthemare4742]

Thanks

[@flannelfishing2951]

Would a low Beta of a portfolio mean the higher its unsystematic risk?

[@kembawalker2705]

No, not necessarily. Beta represents market risk. Just because there's less market risk doesn't mean there's more diversifiable risk; it's not a ratio.

[@Dolcesangue]

Amazon's CEO actually stepped back... haha

[@dantapp5925]

Sound is kinda low

[@valenciaburnette3949]

Global economic slowdown - COVID19. Amazon - Grows exponentially

[@HN-bv7li]

no, amazon stock's going down during the height of covid

[@adamstone6258]

Sadly the video has become corrupt :(

[@src6686]

doesnt help

[@Sportty126]

SRC c