Skip to content

Total Risk

Total risk associated with an investment refers to the complete spectrum of variability or volatility in the returns that the investment might generate. It encompasses all the different types of risks that can impact the investment's performance.

  • Variance: Total risk is often quantified by the variance in the investment's returns, which measures the spread of an investment's returns around their mean or expected value.
  • Range: This risk can also be visualized through the range of possible return outcomes, representing the spread or breadth of variations in returns.

Risk Elements

Total risk can be broadly divided into two categories:

Systematic Risk

  • Definition: Systematic risk, also known as market risk, is the risk inherent to the entire market or market segment. It is the type of risk that cannot be eliminated through diversification.
  • Causes: This risk is attributed to factors that affect the entire economy or market, such as inflation rates, exchange rates, political instability, interest rates, and the economic cycle.

Unsystematic Risk

  • Definition: Unsystematic risk, also known as specific or idiosyncratic risk, is associated with a particular company or industry.
  • Mitigation: Unlike systematic risk, unsystematic risk can be reduced or eliminated through diversification. By investing in a variety of assets, the impact of a single security's performance is minimized.

Investors must consider both systematic and unsystematic risks when evaluating potential investments and building their investment portfolios. Understanding these elements of total risk is essential for making informed decisions that align with one's risk tolerance and investment objectives.

Ask Hive Chat Chat Icon
Hive Chat
Hi, I'm Hive Chat, an AI assistant created by CollegeHive.
How can I help you today?
🎶
Hide