1. Profile photo of anonymous says

    Sir, what if the 3 industries you gave as an example are belonging to 3 different sectors? Then is it possible to diversify the risk? Or is diversification possible only among industries in the same business sector?

    Could you please correct me- Total risk= Systematic + Unsystematic.
    Systematic risk cannot be eliminated nor reduced. Unsystematic risk can be removed or reduced by diversification. Did I understand it right?

    And is it because of the presence of systematic risk that risk cannot be equal to 0?

    • Profile photo of John Moffat says

      In practice you would diversify between shares in different sectors. The unsystematic risk would be reduced and the systematic risk would be the average of the systematic risk of the shares chosen.

      Yes – the total risk is systematic and unsystematic.

      Yes – unsystematic can be reduced/removed by diversification.

      In theory there can be systematic risk of zero – an investment with zero risk (such as government securities). In practice even government securities carry some risk and so there will always be some risk.

  2. Profile photo of Seyyo says

    Hello Sir,

    I just started watching the videos and I wanted to know in advance if Mergers and Acquisitions are well covered in the video lectures – I struggled in question 1 in the Dec 2014 exam and this time I want to be ready for it…

    Thank You.

    • Profile photo of John Moffat says

      I did not say that at all!

      I said that in real life, investments are positively correlated and so risk cannot be removed (the systematic risk will remain) but that it can potentially be reduced.

      Ice cream and umbrella was an extreme example where they were perfectly negatively correlated that does not occur in real life.

    • avatar says

      From the previous lectures, Tutor has clearly explained that when the standard deviation increases the risk also increases. Standard deviation is the measure of risk itself. Am I right admin? Correct me if I am wrong :) ?

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