What is systematic risk?

Systematic risk refers to the inherent risk that affects the overall market or economy rather than a specific industry or company. This type of risk is caused by factors such as changes in economic policies, interest rates, natural disasters, geopolitical events, or other broad factors that can impact the performance of all assets within the market. Unlike individual investment risks, which can be mitigated by diversification, systematic risk is unavoidable and impacts all securities simultaneously.

Understanding systematic risk is crucial for investors as it helps them recognize that some elements of risk cannot be diversified away, meaning that even a well-diversified portfolio can still be influenced by macroeconomic changes. As a result, investors often seek strategies to manage or hedge against systematic risk, such as asset allocation or investing in instruments like options or futures.

The fact that systematic risk affects the entire market underlines its importance for financial analysts and portfolio managers when evaluating potential investments and designing strategies to maximize returns while keeping a handle on overall exposure to market-wide fluctuations.