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Assalam walaikum. Are business risk and the risk arising because of gearing, both of which we incorporate through Beta in CAPM, examples of Systematic Risk? Thank You… 🙂
Systematic risk is the Risk of fluctuation in equity value based upon factors beyond the control of entity i.e. those factors that effect whole of the securities listed on SE.
Equity bets represents systematic business risk as well as systematic financial risk
Asset beta represents only systematic business risk.Examples of systematic risk (though depends on the circumstances of the case and are subjective) are:
– risk of change in base interest rates
– risk of change in tax rates
– risk of war or political instability, etcThese are the factors which would effect the overall stock market.
in CAPM we use equity beta because investor wants return against total systematic risk (business as well as financial)…
For an ungeared co we use asset beta only because asset beta = equity beta becasue of zero financial risk
What nokia says is correct – systematic risk is the risk due to general economic factors. If there is gearing in the company then this increases the risk for the shareholders.
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