Risk, beta and exchange rate risk
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Discuss the measure of total risk and compare systematic risk to nonsystematic risk. Also discuss why systematic risk is the relevant risk rather than total risk.
Discuss the distinction between a firm's unlevered beta and its levered beta.
Discuss tactics that a company might use to limit foreign exchange risk.
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Solution Summary
The solution explains systematic risk, non-systematic risk, unlevered beta, levered beta and how to limit foreign exchange risk.
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Discuss the measure of total risk and compare systematic risk to nonsystematic risk. Also discuss why systematic risk is the relevant risk rather than total risk.
The total risk comprises of systematic risk and unsystematic risk. Systematic risk is a risk unique to a company such as fall in demand of an umbrella manufacturer if the rains are deficient while systematic risk is a risk which affects all the firms such as an increase or a decrease in interest rates.
The measure of total risk is the standard deviation is a measure of total risk. It measures the variation in the returns for a firm which may be due to systematic and unsystematic risk and so reflect the total risk of the firm.
Systematic risk is relevant since unsystematic risk can be diversified away. What this means is that we can construct a portfolio of securities such that the unsystematic risk of the portfolio is much lower as compared to the unsystematic risk of the individual securities. Total risk would be higher than systematic risk and so we would expect to have a higher return for total risk as compared to unsystematic risk which is ...
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