What is systematic risk?

Systematic risk refers to the risk that affects the overall market or a particular market segment, rather than being tied to a specific asset or investment. It encompasses factors that impact the market as a whole, such as economic downturns, interest rate changes, political instability, or natural disasters. This type of risk is often unavoidable through diversification because it influences all investments in the market to some degree.

In contrast, risks associated with specific assets, credit defaults, or regulatory changes are considered unsystematic risks, which affect individual securities or companies. Systematic risk is what investors consider when evaluating the broader implications of economic changes on their investment portfolio. Understanding systematic risk is crucial for developing strategies that aim to manage or mitigate the overall market risk facing an investment.