Systemic Risk

(redirected from Non-Diversifiable Risk)

Systemic Risk

Risk common to a particular sector or country. Often refers to a risk resulting from a particular "system" that is in place, such as the regulator framework for monitoring of financial_institutions.

Systemic Risk

A risk that is carried by an entire class of assets and/or liabilities. Systemic risk may apply to a certain country or industry, or to the entire global economy. It is impossible to reduce systemic risk for the global economy (complete global shutdown is always theoretically possible), but one may mitigate other forms of systemic risk by buying different kinds of securities and/or by buying in different industries. For example, oil companies have the systemic risk that they will drill up all the oil in the world; an investor may mitigate this risk by investing in both oil companies and companies having nothing to do with oil. Systemic risk is also called systematic risk or undiversifiable risk.
References in periodicals archive ?
Non-diversifiable Risk: A risk that affects a large segment of society at same time.
The indemnification and risk pooling properties of insurance facilitate commercial transactions and the provision of credit by mitigating losses as well as the measurement and management of non-diversifiable risk more generally.
The coefficient [[beta].sub.j] is the measure of the non-diversifiable risk associated with wind and solar production at location j.
According to Sharpe (1970, p.77), some of the assumptions made for the development of the model are: (i) assets only remunerate non-diversifiable risk; (ii) investors have homogeneous expectations with respect to the expected returns and the variance of returns; (iii) it is possible to invest and raise funds at the risk-free rate in unlimited quantities; (iv) absence of market imperfections; (v) investors are rational and make decisions solely in terms of expected returns and assets risk; (vi) investors are risk-averse selecting between two portfolios with the same expected return the one with the lowest risk.
(1979) examine the impact that the segment disclosure requirement by the Securities and Exchange Commission's (SEC) had on total risk and non-diversifiable risk. Their sample consists of firms affected and unaffected by the SEC decision.
In this sense, TPI is excess return as a percentage of non-diversifiable risk or systematic risk, whereas the SPI is indexed on total risk (excess return relative to total firm risk).
[[sigma].sub.pt] is the variability in return consisting of diversifiable risk and non-diversifiable risk. Treynor's Index ([T.sub.n]) measure is a reward to volatility of the portfolio.
where [S.sub.i.sup.2] is the variance of security i, total security risk, [S.sub.m.sup.2] is the variance of the stock market index, [S.sub.ei.sup.2] is the variance of the random factor of security i (model (3))--diversifiable risk, and [[beta].sub.i.sup.2] x [S.sub.m.sup.2] is the non-diversifiable risk.
From a finance perspective, the distinction between pure and speculative risk blurs because the rate of return shareholders require depends on its non-diversifiable risk (systematic risk) or core risk, which can include pure and speculative risk components, investors do not accept a lower rate of return for the stock of a firm that does, through a risk management program, what the shareholders can do for themselves at lower cost through portfolio diversification.
Next we examine whether the excess currency returns (deviation from UIRP) is due to non-diversifiable risk.
The CAPM and related theories stress that a project's total risk comprises of two categories - diversifiable and non-diversifiable risk. Non-diversifiable risk is also called market risk because it is a function of general environmental conditions which affect an investment in the whole stock market, such as inflation and taxation and interest rate changes.
If option listing increases (reduces) non-diversifiable risk, c would be positive (negative).