The final question in the examination paper asked how shareholders could assess the extent to which they faced business risk, financial risk and systematic risk, and an explanation of the nature of each of these risks.
Shareholders face the risk arising from the variability of their returns, which can be seen as profit after tax or distributable profit. These returns are related to business risk (measured by operational gearing) and financial risk (measured by financial gearing or statement of financial position gearing). Both of these risks are part of the systematic risk faced by shareholders, which can be assessed by the equity beta.
An alternative answer could discuss the asset beta of a company (business risk) and the equity beta of a company (business risk plus financial risk), noting that financial risk canbe related to the difference between the asset beta and the equity beta.
Many answers to this question showed the need to think about the nature of the risk faced by shareholders. Better answers gave evidence of an understanding of underlying concepts and used key terms.