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Definition of Systematic

Systematic Image 1

Systematic

Common to all businesses.



Related Terms:

Nonsystematic risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also
called unique risk or diversifiable risk. systematic risk refers to risk factors common to the entire economy.


Systematic risk

Also called undiversifiable risk or market risk, the minimum level of risk that can be
obtained for a portfolio by means of diversification across a large number of randomly chosen assets. Related:
unsystematic risk.


Systematic Risk

The amount of total risk that cannot be eliminated by portfolio
diversification. The risk inherent in the general economy as a
whole. Also known as market risk.


Systematic risk principle

Only the systematic portion of risk matters in large, well-diversified portfolios.
The, expected returns must be related only to systematic risks.


systematic withdrawal plan

Plans offered by mutual fund companies that allow unitholders to receive payment from their investment at regular intervals.



Unsystematic risk

Also called the diversifiable risk or residual risk. The risk that is unique to a company
such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.
Related: systematic risk


Unsystematic Risk

The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as asset-specific risk or
company-specific risk.


Systematic Image 2

Abnormal returns

Part of the return that is not due to systematic influences (market wide influences). In
other words, abnormal returns are above those predicted by the market movement alone. Related: excess
returns.


allocation

the systematic assignment of an amount to a recipient
set of categories annuity a series of equal cash flows (either positive or negative) per period


Amortization

The systematic and rational allocation of capitalized costs over their useful lives.
Refer also to depreciation and depletion.


Asset-specific Risk

The amount of total risk that can be eliminated by diversification by
creating a portfolio. Also known as company-specific risk or
unsystematic risk.


Autonomous Expenditure

Elements of spending that do not vary systematically with variables such as GDP that are explained by the theory. See also exogenous expenditure.


Beta

A measure of the riskiness of a specific security compared to the
riskiness of the market as a whole; measure of the systematic risk
of a security or a portfolio of securities


Beta (Mutual Funds)

The measure of a fund's or stocks risk in relation to the market. A beta of 0.7 means
the fund's total return is likely to move up or down 70% of the market change; 1.3 means total return is likely
to move up or down 30% more than the market. Beta is referred to as an index of the systematic risk due to
general market conditions that cannot be diversified away.


Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.


Company-specific risk

Related: Unsystematic risk


Systematic Image 3

cost accounting

a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation


Depletion

The systematic and rational allocation of the cost of natural resources over their useful
lives. Refer also to amortization and depreciation.



Depreciation

The systematic and rational allocation of the cost of property, plant, and equipment
over their useful lives. Refer also to amortization and depletion.


Diversifiable risk

Related: unsystematic risk.


Diversification

Dividing investment funds among a variety of securities with different risk, reward, and
correlation statistics so as to minimize unsystematic risk.


Due Diligence

The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction.(i.e. verify that information is what it is proposed to be).


Firm-specific risk

See:diversifiable risk or unsystematic risk.


Idiosyncratic Risk

Unsystematic risk or risk that is uncorrelated to the overall market risk. In other words,
the risk that is firm specific and can be diversified through holding a portfolio of stocks.


Index model

A model of stock returns using a market index such as the S&P 500 to represent common or
systematic risk factors.


Market risk

Risk that cannot be diversified away. Related: systematic risk


market risk

Economywide (macroeconomic) sources of risk that affect the overall stock market. Also called systematic risk.


Open-market purchase operation

A systematic program of repurchasing shares of stock in market
transactions at current market prices, in competition with other prospective investors.



planning

the process of creating the goals and objectives for
an organization and developing a strategy for achieving
them in a systematic manner


Principal of diversification

Highly diversified portfolios will have negligible unsystematic risk. In other
words, unsystematic risks disappear in portfolios, and only systematic risks survive.


Rational Expectations

The best forecasts that can be made given the data available and knowledge of how the economy operates. Rational expectations implies random errors, no systematic errors.


Residual risk

Related: unsystematic risk


Second pass regression

A cross-sectional regression of portfolio returns on betas. The estimated slope is the
measurement of the reward for bearing systematic risk during the period analyzed.


Seykota, Ed

Ed Seykota is interviewed by Jack Schwager in Schwager's book, Market Wizards. Seykota was
graduated from MIT in the early 1970s, and went on to develop the first commercially sold commodities trading system. Seykota went into business for himself, and in the years 1974-1989, managed to grow a
$5,000 trading account to over $15 million dollars. Mr. Seykota is a trading genius who has been able to
identify robust patterns of price action that repeat themselves in different markets. His quantitative and
systematic approach to trading has been an inspiration for many. Mr. Seykota is also a genius when it comes
to understanding human psychology.


Single index model

A model of stock returns that decomposes influences on returns into a systematic factor,
as measured by the return on the broad market index, and firm specific factors.


Undiversifiable risk

Related: systematic risk


Unique risk

Also called unsystematic risk or idiosyncratic risk. Specific company risk that can be eliminated
through diversification. See: diversifiable risk and unsystematic risk.


Well diversified portfolio

A portfolio spread out over many securities in such a way that the weight in any
security is small. The risk of a well-diversified portfolio closely approximates the systemic risk of the overall
market, the unsystematic risk of each security having been diversified out of the portfolio.


zero-base budgeting

a comprehensive budgeting process
that systematically considers the priorities and alternatives
for current and proposed activities in relation to organization
objectives; it requires the rejustification of ongoing activities



 

 

 

 

 

 

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