The Language of Risk - Riskese - Show 9-2

Thursday, December 22, 2011 4,474 views

Step 8 of the 12-Step Program teaches the difference between systematic and unsystematic risk, how concentrating stocks in a portfolio doesn't pay, and why it's better to own thousands of companies instead of just a few. Unsystematic risk is company specific risk (e.g. lawsuits, fraud, bad management, and other unique circumstances of individual companies) and does not have an expected return. It is simply unrewarded risk and can be avoided by proper diversification. On the other hand, systematic risk is market wide risk that everyone is subjected to, including war, recession, and inflation. Owning stocks and bonds in an appropriate diversified blend is rewarded for the level of risk taken.

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