What does systematic risk refer to?

Systematic risk refers to the risk inherent to the entire market or a particular market segment. This type of risk is caused by factors that affect the overall economy or large segments of it, such as interest rates, inflation, political instability, or global events. Because these factors impact a wide range of assets, systematic risk cannot be eliminated through diversification. All investments are subject to this type of risk, meaning that even a well-diversified portfolio can be affected by market-wide changes.

In contrast, other types of risks, such as specific or unsystematic risks, are associated with individual companies or industries and can often be mitigated through diversification. By investing in a variety of assets, one can reduce exposure to risks that are unique to specific firms or sectors. Understanding systematic risk is crucial for investors because it underscores the importance of market conditions and macroeconomic factors that could influence the performance of investments in a comprehensive manner.