Total Risk

On Thursday, we talked about total risk is the sum of diversifiable risk and non-diversifiable risk. For any firm, the diversifiable risk doesn’t affect the cost of capital. As a matter of fact, the non-diversifiable risk will increase the cost of capital. The components of non-diversifiable risk are market risk and systematic risk.

I read the news on Yahoo-Finance today. It seems to me that the market is having a downturn. The stock market keeps falling almost daily. Market experts suggest that the best and the only solution to our situation is time.

The chief investment officer of Johnson Illington Advisors, Hugh Johnson, said that “there is an earning recession.” He also noted that the S&P 500’s operating earning growth was lower in the third quarter than it was in the second quarter; and it is sure to be lower in the fourth quarter than it is in the third quarter in 2007.

Systematic risk is the risk inherent in the entire market or entire market segment. The sources of systematic risk include interest rate, recessions, and wars overseas. Systematic risk affects a broad range of securities. With the possibility of going into a recession, the systematic risk keeps raising. It results in a raise in the total risk in our economy.

http://biz.yahoo.com/ap/080120/wall_street_week_ahead.html
http://www.investopedia.com/terms/s/systematicrisk.asp