All manner of investment risk falls into one of two categories, either diversifiable (also known as non-systematic or non-market risk) or nondiversifiable (known also as systematic or market risk). If risk cannot be diversified away by increasing the number of different types of investments in a portfolio, then it is systematic. Economic activity, monetary and fiscal policy, the level of interest rates and market sentiment are difficult, if not impossible, to diversify away.


Moreover, the correlation amongst various asset classes in times of heightened market volatility historically has increased, adding another challenge to the asset allocation and risk management processes. By contrast, if risk can be mitigated through diversification between and within asset classes, then it is non-systematic or diversifiable. Please note that the recommended means of risk reduction that follow are instructive and meant to deepen the reader's understanding. The investor's needs and circumstances, as embodied in the Investment Policy Statement (a blueprint for how the portfolio is to be managed), govern the portfolio management process. Each definition of risk indicates whether or not it is diversifiable.


Look Out!
An understanding of various types of risks is critical when evaluating the suitability of an investment for a client. Know and understand risk, and whether or not it is diversifiable. Expect questions asking the candidate to identify the most significant risk associated with an investment or the risk with which a particular investor should be concerned.

Systematic Risks

Related Articles
  1. Investing

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  2. Investing

    How To Manage Portfolio Risk

    Follow these tips to successfully manage portfolio risk.
  3. Investing

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  4. Personal Finance

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  5. Investing

    The Short Guide To Insure Stock Market Losses

    The best ways to hedge against losses are to diversify your portfolio and to use a variety of options.
  6. Tech

    How to Help Clients See Value of Diversification

    One of an advisor’s most important jobs is getting clients to understand the value of diversification. Here are some tips that will help.
  7. Financial Advisor

    Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

    Examine the relative advantages and disadvantages of utilizing either a concentrated or a diversified investment portfolio strategy.
  8. Financial Advisor

    Active Risk vs. Residual Risk: Differences and Examples

    Active risk and residual risk are common risk measurements in portfolio management. This article discusses them, their calculations and their main differences.
  9. Investing

    Balancing the Different Risks Investors Face

    One of the keys to investing successfully is to balance different types of risk.
Frequently Asked Questions
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center