Systematic and Unsystematic Risk
Chapters in this video
- 0:00 Carla's tech portfolio and the market-wide monster
- 1:38 Systematic risk and the PRIME acronym
- 2:43 Unsystematic risk: business, financial, and liquidity
- 3:22 Systematic vs unsystematic head-to-head
- 4:23 Correlation coefficient: +1.0, zero, and -1.0
- 6:02 The same-industry diversification trap
- 6:51 Rapid-fire exam recap
What this video covers
- What systematic risk is, why it cannot be eliminated through diversification, and the PRIME acronym (Purchasing power, Reinvestment, Interest rate, Market, Exchange rate)
- Why hedging and asset allocation are the only tools that mitigate systematic (market) risk
- What unsystematic risk is and its three subtypes: business risk, financial risk, and security-specific liquidity risk
- The single most-tested distinction on this topic: diversification eliminates unsystematic risk, never systematic risk
- How to read a correlation coefficient between two assets and translate it into diversification benefit
- Why a +1.0 correlation gives zero diversification benefit, 0 gives moderate benefit, and -1.0 gives the theoretical maximum
- Why adding a second stock in the same industry (like a second oil name) is a classic exam trap for "improving diversification"
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