- 1). Assess systematic risk by examining factors that affect entire markets, not just your investment. Investigate the possible effects of factors like currency value changes (for international investments), interest rate changes, and entire economic downturns.
- 2). Hedge against systematic risks by buying options or signing futures contracts. This guarantees a certain price for your investment in the future.
So, if you buy $100 worth of oil, you can hedge by agreeing to sell it in a year for $120. This means that if the entire economy goes downhill and the value of your oil drops to $80, you are still protected. However, if the economy booms and the value of your oil rises to $150, you still have to sell for $120. - 3). Assess unsystematic risk by examining factors that affect only your investment. Investigate the effects of specific events. An example of unsystematic risk is if you rent a property out and the renter leaves without paying the rent. The other properties in the area were not affected, so the risk is unsystematic.
- 4). Manage unsystematic risk by diversifying. So, you could manage unsystematic risk by owning 20 percent shares in five properties, rather than 100 percent of one property.
This shields you from risk but also reduces your profits if one of the properties skyrockets in value. If you own 100 percent of a $100,000 house that increases in value to $300,000, you can make $200,000 by selling. If you only own a 20 percent share, though, you only can make $40,000--a substantial amount, but certainly not $200,000.
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