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Hello tutor,
Examiner answer”Nature and assessment of systematic risk,
From a shareholder perspective, systematic risk is the sum of business risk and financial risk.”From my understanding, Systematic risk includes market risk, interest rate risk, purchasing power risk, and exchange rate risk.The business risk and financial risk are part of unsystematic risk which can be divisified away.
Why the biz risk and financial risk is part of systematic risk?
Have watched the lecture and notes but still confuse
Financial risk (i.e. risk due to gearing) is not extra risk that we add on.
Gearing multiplies the existing risk and make the risk higher as a result. I explain this, with an example, in my lectures on Chapter 13 of the notes – it will help you to watch the lecture again.
With CAPM we are only interested in the systematic risk, and the more gearing there is then the higher the systematic risk will be.
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