Systematic Risk and Unsystematic Risk

Risk can defined as probability of actual return come lower than expected return on an
investment, it can be measure by calculating the standard deviation of the average return and
historical data, high risk always come with high returns. In finance terms there is difference type
of risk, but it can always categorized in systematic risk and unsystematic risk.

Systematic Risk
- Political Risk
- Special Event- Election of US

Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the
overall market, not just a particular stock or industry. This type of risk is both unpredictable and
impossible to completely avoid. It cannot be mitigated through diversification, only through
hedging or by using the right asset allocation strategy. In simple word, investor can do nothing to
avoid systematic risk but they can avoid high level of risk by acquiring less volatility. Example
of systematic risk are foreign exchange risk decline, it affect to entire matket.

The nature of the systematic risk itself demands great attention of investors, managers and
researchers in finding ways to understand and manage this type of risk effectively. 1MDB news
bring a big impact to Malaysia stock market. UMW could not escape from this systematic risk,
even those corporation having IPO outside Malaysia is also affected by this news. In last trade
day of April 2016, KLCI drop 2.04 point to 1672.72, UMW drop from 6.64 to 6.56 due to the
break of contract by 1MDB. The stock price of UMW in May 2016, keep dropping to the lowest
of 4.98.

November 2016, United State having election for new president, it brings huge effect to entire
stock market especially Asia. November 9th Donald Trump has successful get the higher vote and
become next president of United State, many places having protest against this result. Japan
Nikkei Index-NI225 be most affected and government and central bank having urgent meeting to
solve this problem. This result affects that KLCI drop by 23.48 point at end of trade hour taper
off to 16.20. In the same day UMW have drop from 5.6 to 5.46, and keep dropping until
November 14th to 5.08.
Unsystematic Risk

- Financial Risk
- Legal Risk

Unsystematic risk, also known as "specific risk," "diversifiable risk" or "residual risk," is the
type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can
be reduced through diversification. “Unsystematic” refers to quality that not commonly share
among many investment opportunities. Example can include location risks, business risks,
succession risks.

In the case of UMW, they are facing financial risk problem, it is way leading investor lose
money when they investing that has debts, since the cash flow inadequate to meet the financial
obligations. The largest debts from their subsidiary corporation (UMWOG-5243), facing 13
billion that expired on year end of 2016, Hong Leong Investment Bank Research, analyze that
they will seek for help from UMW to pass this obstacle, estimate UMW will issue 7 billion
Islamic bonds to raise funds. UMWOG have to improve debts management, to avoid their
mother corporation spend on debts repayments instead of other expand.

Automobile is the main income for UMW, they act as a dealer to imports Toyota, from Japan.
Local car manufacturer is biggest competitor for them, imagine there is two major firm that
competition in one sector: Firm A,B. Malaysia government only subsidize Firm A, the stock
value of it tends to rise, and Firm B value tends to fall. Proton is Firm A while UMW act as Firm
B, since there are not received subsidize from local government. Their negative effects occur at
selected company only, if an investor buy both share he might diversify loss in UMW by gains
from Proton. There are some political and legal risk that affect entire industry that stated at
systematic risk, it is not possible control by individual.

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