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Systematic and Unsystematic Risk. What are the sources of Risk? (pp. 297 - 300). Announcements & Exp. Returns. Actual returns (R) will be : ` R + U (expected + unexpected) Investors form “expectations” about future Expected information is already discounted by the market

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systematic and unsystematic risk

Systematic and Unsystematic Risk

What are the sources of Risk?

(pp. 297 - 300)

announcements exp returns
Announcements & Exp. Returns
  • Actual returns (R) will be:

`R + U (expected + unexpected)

  • Investors form “expectations” about future
    • Expected information is already discounted by the market
      • i.e., the value of the information is already incorporated into the stock prices
      • Attempts to exploit Public information (make large returns) will not be successful

Chhachhi/519/Ch. 11

surprises
Surprises
  • Unexpected Returns: caused by surprises
    • Surprises can be GOOD or BAD!
  • Total return (R) = E(R) + U
  • Announcements are news only to the extent they contain “surprise” element
    • “No burglary in BG on Sept. 28” --no news
    • “No burglary in New York on Sept. 28”-- major news!

Chhachhi/519/Ch. 11

systematic vs unsys surprises
Systematic vs. Unsys. Surprises
  • Systematic risk:
    • surprises that affect “large” no. of assets
      • Usually in the same “direction”
      • I/Rs, Unemployment, Elections, GDP,……
  • Unsystematic risk:
    • surprises that affect “small” no. of assets
  • Some “firm-specific” news turn into “economy-wide” events!!!`
  • R = `R + U = `R + m + e
risk systematic unsystematic

Risk: Systematic &Unsystematic

We can break down the risk, U, of holding a stock into two components: systematic risk and unsystematic risk:

Total risk; U

Nonsystematic Risk; 

Systematic Risk; m

n

Chhachhi/519/Ch. 11