Important Points for IC 99 - Asset Management Exam
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Sometimes the return from a security of a company may vary from certain factors that are pertaining to the company or the industry the company belongs to. Variability in returns of the security arise on account of such factors which are micro in nature and constitute "unsystematic risks". Unsystematic risks can be subdivided into two major types - Business Risks and Financial Risks.
Business risks arise from trading of securities affected by business cycle, technology changes etc.
Financial Risks arise due to changes in the capital structure of the company. It is expressed in terms of debt-equity ratio and also called leveraged risks.
Combining many securities in a portfolio, un-systematic risks can be reduced to large extent. Unsystematic risk can be reduced through diversification while Systematic risks including market risks etc. as discussed earlier are "un-diversifiable risks". Un-systematic risks are called diversifiable risks.
Sharpe Ratio computes the risk premium of the investment portfolio per unit of total risk of the portfolio.
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