Explain the Nature of Common Stock Risk

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The Answer is When investing in a stock, an investor assumes the risk of realizing less than the expected return. Closer scrutiny reveals that this risk has two important components; namely, the risk that the variability in return would be caused by factors that affect the prices of all stocks - market/systematic risk or undiversifiable risk - and factors that are unique to a firm or industry - non-market/unsystematic risk or diversifiable risk.
Market/unsystematic risk or undiversifiable risk refers to both the economic and the market risk. The former refers to the risk that slower economic growth will cause investment in stocks to decline. Recessions can adversely affect shares of growth companies, cyclical companies, and other types of companies. In addition, market risk/systematic risk refers to risks associated with political developments, tax law changes, investor psychology, foreign domination of the US investment market, leveraged buy-outs, and insider trading fiascos.
In contrast to the undiversifiable risk, the diversifiable risk refers to that portion of the variability of a stock's return which is the result of unexpected events or developments within the company or the related industry.

Explain the Nature of Common Stock Risk

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