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Default Risk

The event in which companies or individuals will be unable to make the required payments on their debt obligations.

To mitigate the impact of default risk, lenders often charge rates of return that correspond the debtor's level of default risk.

The higher the risk, the higher the required return, and vice versa.

Unsystematic risk

also known as "specific risk," "diversifiable risk" or "residual risk,”

is the type of uncertainty that comes with the company or industry you invest in.

Unsystematic risk can be reduced through diversification.

For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be unsystematic risk.

Systematic risk

also known as "market risk" or "un-diversifiable risk”

is the uncertainty inherent to the entire market or entire market segment.

Also referred to as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price.

Volatility is a measure of risk because it refers to the behaviour of your investment.

Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it will experience a dramatic change in either direction.

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