Systematic Risk

Loading the player...

What is 'Systematic Risk'

The risk inherent to the entire market or an entire 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 right asset allocation strategy.

BREAKING DOWN 'Systematic Risk'

For example, putting some assets in bonds and other assets in stocks can mitigate systematic risk because an interest rate shift that makes bonds less valuable will tend to make stocks more valuable, and vice versa, thus limiting the overall change in the portfolio’s value from systematic changes. Interest rate changes, inflation, recessions and wars all represent sources of systematic risk because they affect the entire market. Systematic risk underlies all other investment risks.

The Great Recession provides a prime example of systematic risk. Anyone who was invested in the market in 2008 saw the values of their investments change because of this market-wide economic event, regardless of what types of securities they held. The Great Recession affected different asset classes in different ways, however, so investors with broader asset allocations were impacted less than those who held nothing but stocks.

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, less than 1 means less systematic risk than the market, and equal to one means the same systematic risk as the market.

Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Unsystematic risk can be mitigated through diversification.

RELATED TERMS
  1. Company Risk

    The financial uncertainty faced by an investor who holds securities ...
  2. Specific Risk

    Risk that affects a very small number of assets. Specific risk, ...
  3. Market Risk

    The possibility for an investor to experience losses due to factors ...
  4. Systematic Manager

    A manager who adjusts a portfolio’s long and short-term positions ...
  5. Operational Risk

    A form of risk that summarizes the risks a company or firm undertakes ...
  6. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. ...
Related Articles
  1. Investing

    Systematic Risk

    Systematic risk, also known as volatility, non-diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes ...
  2. Investing Basics

    Understanding Market Risk

    Market risk is the chance that an investment’s value will decrease due to a factor that affects all investments across the market.
  3. Fundamental Analysis

    How To Manage Portfolio Risk

    Follow these tips to successfully manage portfolio risk.
  4. Investing Basics

    Unlevered Beta

    Learn about how this number provides a measure of how much systematic risk a firm's equity has compared to the market.
  5. Retirement

    Risk and Diversification: Different Types of Risk

    Let's take a look at the two basic types of risk: Systematic Risk - Systematic risk influences a large number of assets. A significant political event, for example, could affect several of the ...
  6. Investing Basics

    One Portfolio For Asset Allocation

    If you treat all of your investments as a single portfolio, you will be better able to maximize returns.
  7. Investing Basics

    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.
  8. Investing Basics

    Explaining Idiosyncratic Risk

    Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.
  9. Bonds & Fixed Income

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  10. Investing Basics

    Offset Risk With Options, Futures And Hedge Funds

    Though all portfolios contain some risk, there are ways to lower it. Find out how.
RELATED FAQS
  1. How do markets account for systematic risk?

    Find out how market participants deal with systematic risk, or the kind of market risk that cannot be diversified away through ... Read Answer >>
  2. How does Beta reflect systematic risk?

    Learn what systematic risk is, what beta is and how it is related to market indexes, and how beta reflects the systematic ... Read Answer >>
  3. How does systematic risk influence stock prices?

    Understand how systematic risk can influence the prices of stocks and how strategic asset allocation can help reduce systemic ... Read Answer >>
  4. What kinds of securities are influenced most by systematic risk?

    Learn what systematic risk is, how investors can measure it with beta and how securities with a beta greater than 1 are most ... Read Answer >>
  5. How does market risk differ from specific risk?

    Learn about market risk, specific risk, hedging and diversification, and how the market risk of assets differs from the specific ... Read Answer >>
  6. Why should investors be concerned with risk management?

    Learn what risk management is, the difference between systematic and unsystematic risk, and why investors should be concerned ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center