Systematic versus Unsystematic Risk You own equity in Lewis-Striden Drugs plc. Suppose you had expected the following events to occur last month:

(a) The government would announce that real GNP had grown 1.2 per cent during the previous quarter.

The returns of Lewis-Striden are positively related to real GNP.

(b) The government would announce that inflation over the previous quarter was 3.7 per cent. The returns of Lewis-Striden are negatively related to inflation.

(c) Interest rates would rise 2.5 percentage points. The returns of Lewis-Striden are negatively related to interest rates.

(d) The chairman of the firm would announce his retirement. The retirement would be effective six months from the announcement day. The chairman is well liked: in general, he is considered an asset to the firm.

(e) Research data would conclusively prove the efficacy of an experimental drug. Completion of the efficacy testing means the drug will be on the market soon.

Suppose the following events actually occurred:

(a) The government announced that real GNP grew 2.3 per cent during the previous quarter.

(b) The government announced that inflation over the previous quarter was 3.7 per cent.

(c) Interest rates rose 2.1 percentage points.

(d) The chairman of the firm died suddenly of a heart attack.

(e) Research results in the efficacy testing were not as strong as expected. The drug must be tested for another six months, and the efficacy results must be resubmitted to the food regulation authority.

(f) Lab researchers had a breakthrough with another drug.
(g) A competitor announced that it will begin distribution and sale of a medicine that will compete directly with one of Lewis-Striden’s top-selling products.
Discuss how each of the actual occurrences affects the returns on your Lewis-Striden shares. Which events represent systematic risk? Which events represent unsystematic risk?