Fundamental risk

Q10B, exam 2005. Can I say systemmatic risk instead of fundamental risk? I think they are the same thing. - sticky

more or less… but fundamental risk is only used in the context of long-short and pair trades (not using a perfect substitute), while systematic risk is used in the context of long-short and also in the context of long only

I said systemmatic risk in my answer. Should I give mark to myself? :slight_smile: - sticky

fundamental = unsystematic. When you diversify the systematic risk, you are left with the fundamental risk.

from memory it’s the risk one faces due to limited perfect substitutes…

Sorry Sticky no points as Fsa-sucker points out Fundamental is Unsystematic b/c its Idiosyncratic risk.

No, fundamental is both systematic + unsystematic risk

Fundamental is Company specific, so hence should be only Unsystematic

not sure about this, but because of fundamental risk, you are exposed to systematic risk, as you are not “market neutral” so, actually, I guess fundamental is not a “comparable” term to systematic or unsystematic risk. It is just one risk that “triggers” other risks

i believe fundamental risk is just a risk that affects company.

^CSK so you are agreeing its not systematic then :slight_smile:

I agree with willy. Fundamental = Company Specific = Unsystematic.

No http://financial-education.com/2007/10/09/fundamental-risk-and-arbitrage-strategies/ As i said fundamental risk is both systematic and unsystematic.

CSK, you are like a See-Saw today :slight_smile:

Systematic fundamental risk, the object of traditional asset pricing theory, is related to exposures to non-diversifiable, economy-wide risk factors. In a frictionless economy with rational investors, all comovement in stock prices should be related to changes in systematic fundamentals. Firm-specific fundamental risk is related to changes in firm-specific fundamentals that are uncorrelated across firms. In the traditional view, such risk is diversifiable. Ok so we are both right :slight_smile: I guess it depends on teh context.

if you say so :wink:

a good example of fundamental risk is a risk of major earthquake, and this can be both considered systematic and unsystematic it is unsystematic in a sence that it will impact the companies directly affected by it, and systematic in a sence that it will also affect the overall market, and it can’t be diversified

^ thats idiosyncratic risk

Not to throw a wrench in this thread but one thing I have been unlear about is condition #2 from below. Can anyone provide color. i saw it discussed before but hard to crystallize concept in my head. Persistent mispricing – two general conditions cause persistent mispriced securities 1) risk-averse arbitrageurs – ie no perfect substitutes exist 2) Systematic fundamental risk – since it is systematic, it cannot be diversified away.

volkovv Wrote: ------------------------------------------------------- > a good example of fundamental risk is a risk of > major earthquake, and this can be both considered > systematic and unsystematic > > it is unsystematic in a sence that it will impact > the companies directly affected by it, and > systematic in a sence that it will also affect the > overall market, and it can’t be diversified so Mr. Volkov (kak vas tam po imeni ochestvu) did we agree that fundamental is both systematic and non-systematic :)?