Monitoring the Systematic and Unsystematic Risk in Dubai General Index

Abstract

Since stocks’ systematic and unsystematic risks are considered the basic requirements to form an investment risk profile, this article develops a discriminant model to monitor the systematic and unsystematic risk in the Dubai Financial Market (DFM) general index. Three sectors are addressed: banks, insurance firms and non-financial firms. In addition, a discriminant model is developed for the whole index. The results show that (a) the financial factors that affect systematic risk are profitability, liquidity, dividend policy and operating income, (b) the financial factors that affect unsystematic risk are operating income, dividend policy and liabilities. In general, the four discriminant models are characterised by high discriminatory power that ranges between 80 per cent and 90 per cent. This shows that the four discriminant models with their funda-mental financial contents can be fairly used for monitoring systematic and unsystematic risk in the DFM general index. Therefore, the answer is ‘yes’ to the question posed in the title of the article.