• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

syst Risk

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › syst Risk

  • This topic has 6 replies, 3 voices, and was last updated 12 years ago by John Moffat.
Viewing 7 posts - 1 through 7 (of 7 total)
  • Author
    Posts
  • November 25, 2012 at 11:22 pm #55745
    auditorzonline
    Member
    • Topics: 6
    • Replies: 4
    • ☆

    Based on the link of systematic and unsystematic risk, would it be right to say that, systematic risk could also be eliminated, at a portfolio where investments have negative correlation amongst them?

    Such as having shares at BP and British Airways?

    November 26, 2012 at 12:14 am #108686
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    Systematic risk (or market risk) is risk due to general economic factors, such as the level of inflation or changes in the exchange rate.
    A shareholder can ‘remove’ the unsystematic risk by creating a portfolio of shares on the basis that although each share individually has unsystematic risk, it ‘cancels out’ with the risk of other shares in the portfolio. We say that a well-diversified portfolio is one where the unsystematic risk has been completely removed. (i.e. diversified away)
    Systematic risk exists in all companies and cannot be removed – all companies will be affected by, for example, the level of inflation. However, the level of systematic risk depends on the type of business and will be different for types of business.
    Although each individual shareholder may not hold a well-diversified portfolio of shares, we assume that shareholders overall are well-diversified and that it is shareholders overall who determine the return given by a share (because it is they who determine the market value of the share). Capital Asset Pricing Model assumes therefore that it is the level of systematic risk that determines the required return from an investment.

    November 26, 2012 at 10:39 am #108687
    auditorzonline
    Member
    • Topics: 6
    • Replies: 4
    • ☆

    Thanks – however, my question was not wrt to the link between sys ans unsys, it fairly understandable that sys risk are driven due to the economical “market” condition, hence, should you invest at negatively correlated investements, such as British Petro. and British airways, should the economic condition turn in favour of petro. you will have worse returns from the airline industry as whole, nonetheless, you would have had hedged your invest through returns from BP – thus negatively correlated…

    Developing on the same concept hence, I would repeat my question if by having negatively correlated investment can we eliminate sys risk as well?

    November 26, 2012 at 11:38 am #108688
    dazhong0703
    Member
    • Topics: 44
    • Replies: 130
    • ☆☆

    Correlation is for unsystematic risk only, as it is for diversification purpose.
    Systematic risk cannot be diversied away, but unsystematic risk can be diversified away. How much can diversify depending on correlation between the investments.

    November 26, 2012 at 8:45 pm #108689
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    @auditorzonlin dazhong0703 is not a tutor so I don’t know why he is answering questions in this forum!

    I understand the point that you are making. However, although you may think that airline companies and oil companies (and it is the business sectors we are looking at – not so much the individual companies) should be negatively correlated, in fact in practice if you look at the figures they are not. Overall all sectors go up and down as the market average goes up and down (to different degrees, which is what the beta is measuring) and they are not negatively correlated. (The only real example of negative correlation – which gives a negative beta – are shares in gold mines, and as a result they give returns of less than risk free. However I would not worry about that for the exam!).

    Where there is potential maybe to diversify systematic risk is by investing in shares in different markets (rather than all in the same country). However, more and more, stock markets in different countries and inter-related and the scope for international diversification becomes more limited.

    November 27, 2012 at 7:18 pm #108690
    auditorzonline
    Member
    • Topics: 6
    • Replies: 4
    • ☆

    Fantastic John! greatly appreciate your response, in particular, the time you had taken out to clarify it…I can justify the same to myself now!

    November 28, 2012 at 5:44 pm #108691
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 7 posts - 1 through 7 (of 7 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • osman-the-zephyr@ on MA Chapter 1 Questions Accounting for Management
  • adebusola on MA Chapter 1 Questions Accounting for Management
  • Sharith on Interest rate risk management (1) Part 5 – ACCA (AFM) lectures
  • Sharith on Interest rate risk management (1) Part 5 – ACCA (AFM) lectures
  • John Moffat on Discounted Cash Flow Further Aspects, Replacement – ACCA Financial Management (FM)

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in