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Sir,
In a question called Bar Co it was asked to discuss both business and financial risks.
Business risk(systematic) was defined using the operating gearing.It completely makes sense since if adverse condition occurs all the business operating in same sector would have adverse market size due to less demand and thus lower profit and higher the operating gearing the worst.
So why is it told that systematic risks cannot be diversified?
Can’t I invest in firms with lower operating gearing ?
(Regardless of the fact that I would be making higher profits if High operating gearing combined with increasing revenue,low variable cost and constant fixed costs.)
Sorry if It don’t make sense.
Different businesses have different levels of systematic risk (and therefore give different returns).
Systematic risk is due to the nature of the business, all that higher operating gearing does is increase the business risk.
By investing in several businesses with differing levels of systematic. risk, the overall level of risk will be different. However the risk cannot be diversified away (i.e. removed) there will always be some systematic risk – all that changes is the level of the risk.
Perfectly makes sense.
So can I conclude that business risk is influenced not just by operating gearing but other factors too.? Like (PESTEL) factors?
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