Practical Significance of Distinguishment between Systematic/Non-systematic Risks

Abstract

This essay illustrates the help in distinguishing the systematic and non-systematic risks, through the detailed analysis on the key factors, characteristics of both systematic and non-systematic risks in the context of financial investment, based on the detailed clarification and analysis on these two risks, plus the actual cases to elaborate the typical cases concerning the two kinds of risks. It is concluded that the systematic risk has the features of inevitability, unpredictability and non-diversifiability, while the non-systematic risk has the opposite features of evitability, predictability, and most importantly the diversificability. Therefore, it is of great help for investors to distinguish these two risks, so that the investors could better hedge the risks by taking suitable countermeasures in constructing the investment portfolio, and ultimately achieve the balance point of risk and return. Last, by discussing the other approaches in understanding risks, it is concluded that although these perspectives are helpful for quantifying the risks, or for academic research, yet in the field of investment, the distinguish between systematic and non-systematic risk is still the basis of reasonable risk management.