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Fundamentals of Corporate Finance Assignment 2

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Identify the components of a stock’s realized return. “The realized return is the total realized return that happens during a specific period (Jonathan Berk, 2010, p. 388).” The components consist of the stock price that it was bought, the price it was sold, and also the dividend. To calculate the stock’s realized return begin by dividing the dividend by amount that it was bought and adding it to the difference between the amount that it was sold by the amount that it was bought and finally dividing that by the amount that it was bought (Jonathan Berk, 2010, pp. 338-341). This will be the last component to a realized return.

Contrast systematic and unsystematic risk. “Unsystematic risk is fluctuations of a stock’s return that are due to company or industry specific news” (Jonathan Berk, 2010, p. 353). This is associated with random causes that can be eliminated through diversification. It’s attributed to firm-specific events such as strikes, lawsuit, regulatory actions, or a loss of a key account. Unsystematic risk is due to factors specific to an industry like labor unions, product category, research and development, pricing, or marketing On the other hand, systematic risk occurs when fluctuations of the stocks returns are changed because of market wide news (Jonathan Berk, 2010, p. 353). These market factors may include situations such as war, inflation, international incidents, or political events. It may be eliminated through diversification and the combination of a security’s non-diversifiable risk and diversifiable risk is called total risk.
Systematic risk is beyond the control of shareholders and cannot be alleviated to a large extent. Dissimilarity to this, the unsystematic risk can be alleviated through portfolio diversification. It is a risk that can be avoided and the market does not pay for taking such risk.

Explain why the total risk of a

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