Write short notes on Systematic and unsystematic risk.

CPA-Financial-Management-Section-3 Revision kit

Systematic risk
This is also called non-diversifiable or market risk. By holding a multiple of assets to form a portfolio, thus risk cannot be eliminated. It is economy-wide risk and affects all firms in the economy. Examples include political instability, inflation, energy crisis (power rationing), increase in interest rates (cost of debt), increase in corporate taxes, industrial strikes etc.

Unsystematic risk
Also called diversifiable risk. Its unique to the company and affects only a single firm. It can be reduced holding a portfolio. Example include legal suits against the firm, loss of clients and supplies, strike employees of the firm etc.

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