Systematic Risk

Systematic risk, or market risk, represents the portion of total risk that impacts the entire financial market or large segments of it due to broad economic, political, or environmental factors beyond individual control. Examples include economic slowdowns, interest rate shifts, inflation, or geopolitical tensions. In contrast to unsystematic risk, which is specific to a company or industry and can be minimized through diversification, systematic risk affects all securities simultaneously and therefore cannot be eliminated by diversifying a portfolio. Investors typically address it through asset allocation, hedging instruments, or investing in low-beta assets to mitigate exposure.

Example: A sudden increase in interest rates or a global recession can cause widespread declines across stock markets, regardless of how diversified an investor’s portfolio is.