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Sir is financial risk also,like business risk,categorized into systematic and unsystematic risk or that it is only systematic risk?
Financial risk, like business risk, can be categorised into systematic and unsystematic risk.
Systematic risk refers to risk factors that affect the entire market or economy, such as interest rate changes or inflation.
Unsystematic risk, on the other hand, is specific to a particular company or industry and can be diversified away by creating a portfolio of investments.
Financial risk, which is the risk associated with fixed interest payments on borrowing, contributes to both systematic and unsystematic risk.
Sir here you have said that financial risk can be both systematic and unsystematic risk
But bpp states
Financial risk is an aspect of systematic risk?Also sir each company have their own specific capital structure
In that sense financial risk should be unsystematic
But we calculate equity beta using financial gearing
It’s quite confusingBusiness risk is the risk associated with operating earnings which, in turn, depend on revenues. Typically, companies operating in the same industry have a similar level of business risk.
In addition to business risk, we can distinguish financial risk, which is associated with the uncertainty of net income and cash flows. The greater the share of debt in the financing of the company, the greater the financial risk.
Financial risk, which is the risk associated with a company’s financial structure, can be considered as part of both systematic and unsystematic risk.
It is systematic because it affects all securities in the market, and it is unsystematic because it is specific to the particular company’s financial decisions and obligations.
So again, systematic risks affect the financial market as a whole, whereas unsystematic risks are unique to a specific company or investment..
So basically we can understand financial risk as something that adds on the systematic or unsystematic business risk
Also sir sorry that another doubt but it’s quite confusing
Bpp states that the assumption of zero debt beta understates business risk
But sir asset beta which reflects business risk does not depend on gearing level and it remains constant as long as business risk remains constant then how debt beta can understate business riskYes to your first question
While in practice, debt does carry some risk and will have a small beta, in exam calculations, it is assumed to be zero for simplicity.
This assumption is made to simplify the calculations and make them easier to understand. However, in reality, debt does have some risk associated with it, and the beta of debt will measure its riskiness. Therefore, assuming a debt beta of zero in exam calculations may understate the level of financial risk.
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