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ACCA December Exams

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  1. Hi Sir,
    As you said that the extent to which, systematic risk affects a company, depends on its type of business (sector/industry). Can we say that systematic & unsystematic risks are somehow interrelated?
    In a portfolio, do we just randomly diversify, or do we consider how the risk of one investment would be offset by another?
    Many thanks 馃檪

  3. So, I’m probably going to sound stupid but I still don’t quite understand CAPM. I get that you have a beta, risk free rates of return etc and then systematic and unsystematic risk, I can do the calculations for ungearing and gearing but I don’t know why you do that to find the cost of equity. I go through the calculations because I know how to do them but I want to understand why I’m doing them. I’ve watched the lectures and something isn’t clicking in my mind to make it all make sense! I’ve got a good understanding of everything else other than this and I don’t know why!!

    • The cost of equity is the return that shareholders demand, and the return they demand is determined by the level of risk in the shares.
      The beta of equity is the measure of the riskiness and so it is this that determines the required return and hence the cost of equity.

      The riskiness of a share is determined by the riskiness of the business (which is measured by the asset beta) but is made more risky by the gearing in the business.

      For more than that I am afraid you are going to have to watch the lectures again, because I do explain in detail (and I do assume you have watched all of the lectures on cost of capital and on CAPM?).

      • Yes I have, I think it’s just my brain not understanding it. I understand all the elements of it and how to do the calculations, it’s just the ‘why am I doing this’ side of things!

        I think it’s something I need to keep going over so I’m going to re watch the lectures and read that chapter in my BPP book over the weekend.

  4. Dear sir,

    The Business risk categories is also new because if we google the risk, then the major categories of risks in finance are systematic risk and Unsystematic risk (Business risk is coming under Unsystematic risk) as below:

    “Systematic – Non diversifiable or uncontrollable by an org – Macro in nature
    Market risk
    Interest rate risk
    Purchasing power or inflationary risk
    Economic, Securities market
    Sociological
    Political
    Legal
    External environment

    Unsystematic – Diversifiable or controllable by an org – Micro in nature – Industry risk
    Business/Liquidity risk – External and internal risk
    Default risk
    Financial/credit risk
    Operational risk
    Uncertainty
    Consumer preferences
    Internal risk”

    Please clarify 馃檪 I am confused for the categorization

    Thanks as always,

    • But I explain the difference between systematic and unsystematic risk in full in my lectures (and give examples), and the relevance !!!

      You will never be asked to produce a long list of examples from Google, but you can certainly be expected to be able to explain the difference between systematic and unsystematic risk.

  10. Hi, john

    This is my first year listening to lectures on open tuition and I have to say you are superb. I totally get this paper and the way how you break it down to a level that we can understand it makes so much sense. It will certainly hep with the discussion part of this paper. Thank you so much. By the way, what other papers do you teach?

    I love your classes, even though I can’t see you in the video you make us feel like we are there with you. And once in a ehile you gives us a little bit of humor. Claasic!

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