Systematic Risk is the risk that affects the entire market or economy and cannot be eliminated through diversification.
Systematic Risk, also known as market risk, arises from factors that impact the entire financial system rather than a specific company or industry. These risks are uncontrollable and unavoidable, even with a diversified investment portfolio.
Common causes of systematic risk include:
Since systematic risk affects all investments, it cannot be reduced through diversification. However, investors can manage it through strategies like asset allocation, hedging, and long-term investing.
Systematic risk is often measured using beta (β), which indicates how sensitive an asset is to overall market movements.
"During a global financial crisis, stock markets across the world fall sharply. Even well-performing companies experience losses due to overall market decline—this is systematic risk."