Systematic Risk

Systematic risk, also known as market risk, is the risk that affects the entire market or a large segment of the market and cannot be mitigated through diversification. It is driven by factors such as economic downturns, political instability, changes in interest rates, or global crises. Unlike specific risk, which affects individual companies or industries, systematic risk impacts all investments and is inherent in the overall market.

Example

During the 2008 financial crisis, nearly all asset classes experienced declines in value due to the widespread market turmoil, representing a significant increase in systematic risk.

Key points

• Risk that affects the entire market or economy.

• Cannot be mitigated through diversification.

• Caused by broad factors like economic recessions, interest rate changes, or global events.

Quick Answers to Curious Questions

How does systematic risk differ from specific risk?

Systematic risk affects the entire market or a large segment of it, while specific risk is unique to a particular company or industry.

What factors contribute to systematic risk?

Economic recessions, political events, changes in interest rates, and global crises are common drivers of systematic risk.

How can investors protect against systematic risk?

Although diversification cannot eliminate systematic risk, investors can use hedging strategies like options or allocate assets across different asset classes to reduce exposure.