the cost of unsystematic risk creates value?

[itsyourz]

according to operational risk B , slide 32

it says, Trasnferring the cost of unsystematic risks creates value because its cost in capital mkt is zero

i dont get it, how does it create value even though its cost is zero?

 

[David Harper CFA FRM]

okaybody,

This is from Stulz Chapter 3 (misclassified by GARP into Stulz Ch 2).

His point is that bankruptcy costs is a diversifiable risk; INTERNALLY TO THE FIRM the "cost of financial distress" is significant. But if the firm, using risk management, can transfer the internally-costly thing to shareholders, they charge zero for it because they can diversify it away. Internally costly but free to shareholders. Ergo, says Stulz, reducing the cost of financial distress is "one of the most important benefits of risk management."

David