Post 1. Systematic risk is the part of the total risk that is caused by the factors that cannot be controlled by a company (CFI Team, 2022). Without a doubt, every company is vulnerable to systematic risks. Unsystematic risk involves risks that can be alleviated or reduced by a company. Systematic risk include interest rate risk, market risks, purchasing power risk, and exchange rate risk. All of these risks are out of the company’s control and undiversifiable. Unsystematic risks are incurred due to a company’s nature of business, financial obligations, the location, and the way management handles day-to-day operations.
To mitigate systematic risk, our company needs to pay close attention to the actions of the Federal Reserve. Interest rates fluctuate throughout the year, and we need to have a solid plan in place to take advantage when the rates are low. We also need to monitor market conditions and trends of market prices in our realm. We must take advantage of every opportunity to increase our profitability in order to create a buffer. The buffers created by our teams being proactive will make it easier to navigate the systematic risks. Without mitigation, we run an even higher risk of lower profitability and returns to our shareholders.
To mitigate unsystematic risks, we must have a strong reliable management corps. Our management must seek ways to be more efficient with day-to-day operations that are in the best interest of the company. If possible, our financial obligations should be kept as low as possible. Of course there will be projects that require us to step outside the comfort zone, but through thorough analysis, we can chose what projects will be more advantageous to the company. We must also know the local laws and regulations to keep us from putting the company in a bind through ignorance. Through well planned diversification, the majority of systematic risks can be easily navigated.
Post 2. What approach would you take in explaining how systematic and unsystematic risks affect risk planning?
It is important to understand that unsystematic risk plus systematic risk determines the total risk of the company. Systematic risk is the risk associated in diversified markets, whereas unsystematic risk is the risk associated with only one specific industry.
Describe your approach.
The approach that I would take would be to determine how unsystematic and systematic risk my company has. It would behoove the company to offer a buffer in risk management to become more involved in a diversified portfolio. As the Chief Risk Officer, it is important to be able to determine the higher risk areas of the business and focus efforts in the direction of least impact on the company.
Name 3 or more systematic or unsystematic risks your company might face.
Examples of unsystematic risk are company strikes and poor business models. Examples of systematic risk are inflation and fluctuations of interest rates.
Think of some implications if your company decides not to be proactive and plan for these risks.
Some implications of not proactively planning for these risks are misguided company business plans, fines, employee retention issues, brand and reputation damage, and monetary losses (Williams, 2022).