systemic risk

Examples of systemic risk in the following topics:

• Portfolio Diversification and Weighting

  • In finance, there are two types of risk – systemic risk and specific risk.
  • Systemic risk is essentially the risk that the markets will experience in a downturn and all investments within that market will be negatively affected.
  • Specific risk is the risk associated with one individual security.
  • The risk associated with the one mountain is called "specific risk. " The risk of bad weather, in this example, is systemic risk.
  • The idea of eliminating risk by spreading investments across pools of underlying stocks and bonds is called "diversification. " A diversified portfolio spreads investments across all asset classes with a weighting system that takes time frame and risk tolerance into account.

• Chapter Questions

  • How does a firm use export creation to reduce a country risk?
  • What is the Risk Rating System, and which four factors are included in this system?
  • Please explain whether or not the Risk Rating System is objective?
  • Distinguish between qualitative and quantities measures for measuring a country's risk?

• Expected Risk and Risk Premium

  • Overall riskiness of an asset is composed of its own individual risk (beta) along with its risk in relation to the market as a whole.
  • A certain amount of risk is inherent in any investment.
  • Systemic risk is the risk associated with an entire financial system or entire market.
  • On the other hand, unsystematic risk is risk to which only specific classes of securities or industries are vulnerable.
  • The term risk premium refers to the amount by which an asset's expected rate of return exceeds the risk free rate.

• Impact of Diversification on Risk and Return: Systematic Risk

  • As a result, the portion of risk that is unsystematic -- or risk that can be diversified away -- does not require additional compensation in terms of expected return.
  • This type of risk cannot be diversified away, and is referred to as systematic risk.
  • This is the portion of risk that pays the risk premium, because the risk associated with this particular segment of the market is more tightly linked to the risk of the market as a whole.
  • This risk is present regardless of the amount of diversification undertaken by an investor.
  • Diversification theory says that the only risk that earns a risk premium is that which can't be diversified away.

• Information and Risk Trade-Off

  • IT risk relates to the business risk associated with the use, ownership, operation, involvement, and adoption of IT within an enterprise.
  • Risk is the product of the likelihood of an occurrence times its impact (Risk = Likelihood x Impact).
  • IT risk management can be viewed as a component of a wider enterprise risk management (ERM) system.
  • IT risk transverses all four of the aforementioned categories and should be managed within the framework of enterprise risk management.
  • Risk appetite and risk sensitivity of the whole enterprise should guide the IT risk management process.

• Host Risk Factors

  • Individuals who have a suppressed immune system or who are on immunosuppressive drugs are particularly susceptible to opportunistic infections.
  • Risk of infection is a nursing diagnosis which is defined as "the state in which an individual is at risk to be invaded by an opportunistic or pathogenic agent (virus, fungus, bacteria, protozoa, or other parasite) from endogenous or exogenous sources. " The risk of infection depends on a number of endogenous sources.
  • Skin damage from incision can increase a patient's risk of infection, as can very young or old age, due to a naive or compromised immune system respectively.
  • Examples of risk factors include decreased immune system resulting from disease, compromised circulation caused by peripheral vascular disease, compromised skin integrity as a result of surgery, or repeated contact with contagious agents.
  • Good nutrition is necessary to reduce risk.

• Risk Adjusting the Discount Rate

  • It is possible to use tools, such as risk modeling in evaluating risk.
  • The risks taken into account in modeling are typically grouped into credit risk, liquidity risk, market risk, and operational risk categories.
  • Market risk is the risk of losses in positions arising from movements in market prices.
  • Operational risk is a very broad concept that focuses on the risks arising from the people, systems, and processes through which a company operates.
  • The most common method of adjusting a discount rate for risk is by starting with a risk-free rate and adding a risk premium.

• Summary, discussion questions, and references

  • A risk assessment should be performed first.
  • Identifying risks provides guidance on where to focus the security requirements.
  • As we illustrated in Exhibit 41, an Information System is comprised of two sub-systems, a social subsystem and a technical subsystem.
  • Describe the four components of an information system.
  • What is the greatest risk to a website?

• Security risks and internet risks

  • Organizations have gone out of business as a result of failed computer systems that were not properly backed-up.
  • We discuss Internet risks in the next section.
  • The risks and particular regulations that apply may vary depending on the types of services offered.
  • It is clear that no single risk management strategy can completely eliminate the risks associated with Internet use and access.
  • Some businesses whose products or services directly or indirectly impact the economy or the health, welfare or safety of the public have begun to use cyber risk insurance programs as a means of transferring risk and providing for business continuity.

• Government Bonds

  • Government bonds are sometimes regarded as risk-free bonds because national governments can raise taxes or reduce spending up to a certain point.
  • Unlikely equity system, the bond secondary market uses a completely different system with different method of trading.
  • There is currency risk for government bondholders.
  • In this instance, the term "risk-free" means free of credit risk.
  • However, other risks still exist, such as currency risk for foreign investors (for example non-U.S. investors of U.S.