What is Systematic Risk ? Describe its types.

Answer 6A(ii) Systematic Risk Systematic risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization's point of view. Systematic risk is a macro in nature as it affects a large number of organizations operating under a similar stream or same domain. It cannot be planned by the organization. In this way economic, political and sociological changes are sources of systematic risk. For example, if an economy moves into recession or if there is a political upheaval, it will cause the prices of nearly all the securities, whether bond or equity to decline. Firms with high systematic risk tend to be those whose sales, profits and stock prices follow the general trend in the level of economic or stock market activity. These may include companies that deal in basic industrial goods like automobile manufactures. Types of systematic risk: Interest rate risk Interest-rate risk is the variation in the single period rates of return caused by the fluctuations in the market interest rate. It particularly affects debt securities as they carry the fixed rate of interest. Market risk Market risk is associated with consistent fluctuations seen in the trading price of any particular shares or securities. It arises due to rise or fall in the trading price of listed shares or securities in the stock market. Purchasing power or inflationary risk Purchasing power risk is also known as inflation risk. It is so, since it emanates (originate) from the fact that it affects a purchasing power adversely. It is not desirable to invest in securities during an inflationary period.