 Bismillahirrahmanirrahim. In connection to portfolio risk management, we have been discussing that risks can be classified in multiple ways depending on their types, depending on their nature. So we'll be studying an important classification here that is systematic and non-systematic risk. This is a fundamental factor point and that has great impact on different calculations and different ratios. In the future, you'll see that on their basis, we will do a lot of different calculations and different returns. So it's learning is very important for us. Systematic risk. Systematic risk is inherent in overall market and cannot be avoided. This is your link from the market, your sensitivity from the market and when we go into this investment, we have to take this risk. It's not avoidable. You have to take that in all circumstances. Investors are exposed to systematic risk by virtue of investing in that market. If you are going to that market or that asset class, then you have to bear associated systematic risk. Definitely you will be rewarded in that. Definitely you will bear that which one of them is better. but point appreciate is that these are to be there and have to be borne by the investors and definitely they'll be rewarded for that. Systematic risk effect the market as whole and it's based on the market operating condition like interest rates, inflation, these are a little more macro level. What will be the change? Now, the market interest rates will change from forecasted to expected so definitely they will impact the markets and you cannot live in isolation that you say that you will not impact the interest rate on me, if you are a banking sector, you are an insurance company, you are related to the overall financial market, then definitely you will be impacted. It will work on some, it will be more, it will be gauging but impact will be there. There is no way to avoid systematic risk but it can be magnified through use of leverage. With leverage you can do less but avoid it, there is no possibility mechanism like this. Let's give an example. For example, government boards are offering a yield of 5% in comparison to stock market which is offering minimum return of 10%. The market is offering 10% return and the yield of the government is 5% so you can see that almost double the market is offering you or the premium is more. Suddenly, government announced an additional tax burden of 1% on stock market transaction. Whatever transaction will be in the market, 1% fee or additional charge will be selected. This will be systematic risk but as an investor, you cannot do anything about it because this is the impact of the market which is coming from the regulatory point of view, which is looking at the economic point of view. So you have to bear that. So this will systematic impact all stock. What happened? The government was offering 5% but the 10% was wiped out by 1%. So that means first comparison was 5% and 10% and now comparison is 5% and 9%. So suddenly the government's traders, the stocks, the investments became more attractive because the difference that was getting the premium was reduced. In contrast, non-systematic risk. Non-systematic risk can be involved with other names as well as unsystematic risk. You call this specific risk. These are all similar names for this. Non-systematic risk is limited to a particular asset class or a particular company's risk or a particular asset class's risk. The good thing is that this risk can be reduced through diversification and even if you diversify well, you can eliminate it. Clearly, we will say again, we can eliminate it. Non-systematic risk is limited to a particular asset class or a particular asset class's risk. It is a function of characteristics of a particular asset. That individual asset, that individual company related points are our specific risk that is non-systematic risk. Investors are capable of avoiding non-systematic risk through portfolio diversification. If you diversify your portfolio well, then your risk will be eliminated. It will be reduced in the beginning and gradually it can be eliminated. A diversified portfolio reduced exporters or reliance on anyone underlying security or asset class. We also talked in the introduction that if you invest all your money in one stock, that means you are taking too much risk. If something happens to that particular stock or that company, then you will be losing a lot. But if you diversify it well, in different asset classes, different scripts, then it will help you out and reduce your excessive risk. Let's take an example of unsatismatic risk. Investors in healthcare stocks may be aware that a major shift in healthcare sector has come forward. For example, you have taken a share of a pharmaceutical company. What happened was that a major shift in the healthcare sector has come forward. That policy directly has a lot of impact. If you invest all your money in it, then it is a good thing but again, when it comes to financial calculation, we don't understand volatility very well. If it can be positive, then we won't say it should be reduced. But if you invest all your money in it, then you are taking too much risk on that, which can be definitely diversified away. The gradual adoption of then potential appeal of affordable care act first written in law. For example, a law came that medicines should be affordable. The pharmaceutical prices that were more, they had to revamp them, redo them. This has a lot of impact on that particular sector. So if someone had invested all their money in it, then the major risk of it has come forward. If we look at it, the CAPEM model also suggests that there are two types of risk, systematic and unsystematic. So two types of risk can be summarized here. Systematic, uncontrollable by any organization, macro in nature, wide. Unsystematic, which are controllable by an organization, micro in nature, which can be diversified away. What are determinants? Systematic risk is generated as beta. So beta is a way which measures the systematic risk. It means that change in stock due to change in market. That means the movement from the market will have an impact on us. So what is our sensitivity with the market? It gages the beta, that means the beta gages your systematic risk. For more comprehensively, it is covariance of stock returns of capital market. What is our covariance with the market? It is a time series regression coefficient. It relates to rates of return of individual securities and portfolio. What is the linkage of individual securities or overall portfolio with the market? It gages properly here. Systematic risk cannot be repeating, but it is important that it cannot be eliminated from security by applying diversification. We will have to bear this if we do diversification. Economic diamonds of systematic risk. Several variables including import, exports of the country, market capitalization overall. These will significantly impact the beta. First we have seen intrasprates and inflation. These are there and then there are many other factors which are going to impact our beta. Nearing further, financial leverage, government, deficits, overall country level. As you can see, the market was not performing so well in the past because economic fundamentals were differing. This will impact our overall systematic risk. When market indicators will improve, the impact of systematic risk will be different. For example, if we draw a table here and in this we have risks and here we have number of securities. How much we can invest in securities. So we saw that if we were here just having one security, then our risk level is here. As we started adding securities, then our risk levels came down. What happened is that more the securities are being added, the risk level falls down. But if you carefully note that it came from here to this level but it is not going further down. This is the part that is unsystematic risk which is diversified by spreading. The lower part, this is systematic. This means that it will not be less. You can see it is growing parallel and not touching the bottom level. This shows that when we are adding securities, our portfolio risk is decreasing overall but which one is ending? Unsystematic is ending and systematic stays there. Here comes a question that how many securities should we add that our unsystematic risk in our portfolio ends? For this we don't have a very finite answer. One thing is empirical evidence. Empirical evidence is not a rule. It is not a theory. But over the years the data collected is based on empirical evidence. Empirical evidence says that if you add 30 securities then your portfolio becomes well diversified. This means that there is a very good level of diversification where the unsystematic risk is reduced. But again, these 30 securities should be well picked. Research based on this. For example, if I start investing and I buy 30 banks then I won't get that much diversification. But I buy some banks, I buy some oil and gas companies, I buy some textile and some cement. This way I make up a 30 pool then my portfolio can be easily said to be well diversified. Ideally, if I add some asset class or some bond with a share or some real estate portfolio I make a 30 pool like this. That will be very well diversified. But again, this is not a rule. This is a research based outcome. Pricing of risk. If an asset has both systematic and non-systematic risk eliminate it and it has assumed that investor will be compensated through return of both types of risk. If you are investing in somebody then there is systematic and unsystematic risk then the assumption should be that we will get a return. But the assumption of finance is that the unsystematic risk you can easily remove. If you diversify your portfolio then the unsystematic risk can be removed. So if something can be eliminated and removed then the market will not compensate you. For example, if a person says that I come to the office and I have an accident then the company will give me a very heavy compensation. In contrast, another employee of a company who says that I am working in mines and I have a risk that there is a fallout in the mines so you should compensate me extra. Who will get compensation? The mine or the car or both? You are right. The mine. The risk of mines is working in such a risk that there is a risk there. So that's more like a systematic risk. A person comes in the car and he says that I drive very fast or I don't wear a seat belt. That's why my risk level is too high so I should compensate. So we will tell him to put on a seat belt. You should follow the driving limits. So that means that his risk is avoidable. Then the company will not compensate and the mine will compensate. Similarly, markets will compensate for systematic risk because you cannot avoid it. The market will not compensate for the unsystematic risk because if you are not diversifying it is your own fault. So the work you can do that can be removed the market will not compensate for it. This would minimize and eventually reduce to zero and non-systematic risk leaving only the systematic. So when we diversify we have seen graphically that the unsystematic was gradually reduced and almost zero. So when it can be zero then there will be no compensation. But we will be compensated for risk that is not in your domain and you can live with it. This scenario this scenario would enslave investors to keep on increasing non-systematic diversifiable risk. This will eventually lead to a zero expected return. You should go below gradually go below. If you take high risk then return can come but the true form in return should be systematic. This scenario of course is not valid and demonstrate cannot be assumed that investor will be compensated for non-systematic diversifiable. That means non-systematic diversifiable risk is not to be compensated by the market. For example you may have excess return but the market is not bound to respond and give you for the unsystematic risk. The correct assumption is that non-systematic risk diversifiable risk is not compensated for. The true picture is that you will not get any return in some cases, for example but the rule of thumb is you will be only compensated for the systematic risk. So there is no incremental reward in gain for taking non-systematic risk in an efficient market. Now this market's efficiency depends on the level. If the market is proper efficient rules are following the structure their efficient hypothesis exists in that case you will not be given any reward for taking unsystematic risk. In developing markets in unstructured markets there can be a lot of reward but again that too the justification of finance is against it. Therefore only the price of systematic risk that you have to expect will be compensated for non-systematic risk does not generate because by taking non-systematic risk you should not get any return. Therefore investors it is important for investors that they diversify their portfolio and spread their investment in different asset classes, in different scripts so that unsystematic risk is eliminated systematic risk will be compensated for you. Then we will see how they rank further but you have to get the return expected access return against systematic risk. Thank you.