International Finance Question?
What is the difference between unsystematic and systematic risk?
How many securities do you have to hold in a portfolio to eliminate all diversifiable risk?
What’s happened to the correlation between equity markets over the last 30 yrs?
Has this improved/made worse the case for international diversification?
- DavidLv 77 years agoFavorite Answer
Definition of 'Systematic Risk'
The risk inherent to the entire market or entire market segment.
Also known as "un-diversifiable risk" or "market risk."
Investopedia explains 'Systematic Risk'
Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Systematic risk can be mitigated only by being hedged.
Even a portfolio of well-diversified assets cannot escape all risk.
Investopedia explains 'Market Risk'
The two major categories of investment risk are market risk and specific risk. Specific risk, also called "unsystematic risk," is tied directly to the performance of a particular security and can be protected against through investment diversification. One example of unsystematic risk is that a company, whose stock you own will declare bankruptcy, thus making your stock worthless.
In their book Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown reported that in one set of studies for randomly selected stocks, "…about 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks."
You can also be diversified by buying a market ETF, like the Spyders, ticker symbol SPY.
Where are the benefits of international diversification?
International Diversification Works (Eventually)
Why Global Diversification Still Makes Sense