16/12/2019 Systematic Risk Definition
TRADING SKILLS & ESSENTIALS RISK MANAGEMENT
Systematic Risk
REVIEWED BY AMY FONTINELLE | Updated Sep 30, 2019
What is Systematic Risk?
Systematic risk refers to the risk inherent to the entire market or market segment.
Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the
overall market, not just a particular stock or industry. This type of risk is both unpredictable
and impossible to completely avoid. It cannot be mitigated through diversification, only
through hedging or by using the correct asset allocation strategy.
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Understanding Systematic Risk
Systematic risk underlies other investment risks, such as industry risk. If an investor has
placed too much emphasis on cybersecurity stocks, for example, it is possible to diversify by
investing in a range of stocks in other sectors, such as healthcare and infrastructure.
Systematic risk, however, incorporates interest rate changes, inflation, recessions and wars,
among other major changes. Shifts in these domains can affect the entire market and cannot
be mitigated by changing around positions within a portfolio of public equities.
KEY TAKEAWAYS
Systematic risk refers to risk affecting the entirety of the market or a segment
thereof.
This type of risk is distinguished from unsystematic risk, which impacts a specific
industry or security.
Systematic risk is largely unpredictable and generally viewed as difficult to avoid.
To help manage systematic risk, investors should ensure that their portfolios include a
variety of asset classes, such as fixed income, cash and real estate, each of which will react
differently in the event of a major systemic change. An increase in interest rates, for example,
will make some new-issue bonds more valuable, while causing some company stocks to
decrease in price as investors perceive executive teams to be cutting back on spending. In
the event of an interest rate rise, ensuring that a portfolio incorporates ample income-
generating securities will mitigate the loss of value in some equities.
Systematic Risk Vs. Unsystematic Risk
While systematic risk can be thought of as the probability of a loss that is associated with the
entire market or a segment thereof, unsystematic risk refers to the probability of a loss
within a specific industry or security.
Systematic Risk and the Great Recession
The Great Recession also provides an example of systematic risk. Anyone who was invested
in the market in 2008 saw the values of their investments change drastically from this
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economic event. The Great Recession affected asset classes in different ways, as riskier
securities (e.g., those that were more leveraged) were sold off in large quantities, while
simpler assets, such as U.S. Treasury bonds, became more valuable.
If you want to know how much systematic risk a particular security, fund or portfolio has,
you can look at its beta, which measures how volatile that investment is compared to the
overall market. A beta of greater than 1 means the investment has more systematic risk than
the market, while less than 1 means less systematic risk than the market. A beta equal to one
means the investment carries the same systematic risk as the market.
The opposite of systematic risk, unsystematic risk, affects a very specific group of securities
or an individual security. Unsystematic risk can be mitigated through diversification.
Related Terms
Market Risk Definition
Market risk is the possibility of an investor experiencing losses due to factors that affect the overall
performance of the financial markets. more
Risk
Risk takes on many forms but is broadly categorized as the chance an outcome or investment's actual
return will differ from the expected outcome or return. more
Hey, What's Making That Stock Go Crazy? Could Be Idiosyncratic
Risk
Idiosyncratic risk refers to the risk inherent in an individual asset or asset group, due to the unique
characteristics of that asset. Idiosyncratic risk can be mitigated through diversification in an
investment portfolio. more
Unsystematic Risk
Unsystematic risk is unique to a specific company or industry and can be reduced through
diversification. more
Risk Management in Finance
In the financial world, risk management is the process of identification, analysis and acceptance or
mitigation of uncertainty in investment decisions. Risk management occurs anytime an investor or
fund manager analyzes and attempts to quantify the potential for losses in an investment. more
Company Risk
Company risk is the financial uncertainty faced by an investor who holds securities in a specific firm.
Learn strategies for how it can be mitigated. more
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