Next video:
Loading the player...

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 from things like natural disasters, wars, broad changes in government policies and other events that cannot be planned for or avoided.

The best way to measure the amount of systematic risk an investment has is to look at the investment’s beta.  Beta measures an investment’s volatility as it correlates to market volatility. A beta greater than one means the investment has more systematic risk than the market. If the beta is less than one, then the investment has less systematic risk than the market.  If the beta equals one, then the investment has the same systematic risk as the market. The market is usually represented by a well known index like the S&P 500, The Russell 2000 Index or The MSCI World Index.

Systematic risk is important for wealth management firms and portfolio managers to helps them create strategies for their clients based on their risk profile. Systematic risk is also important for understanding valuation models like the CAPM model, which describes the relationship between risk and expected return for risky securities.

The effect of systemic risk on a portfolio can be reduced by including risk-free and less-risky assets such as U.S. Treasury securities. Unfortunately, because these ultra-safe investments don't carry much risk, they also won’t offer much of a return.  

Another type of risk, which is more prevalent, is idiosyncratic risk. This risk only affects certain types of investments or sectors, with little correlation to market risk.  Idiosyncratic risk can be hedged by diversifying a portfolio.

 

 

Related Articles
  1. Investing

    How To Manage Portfolio Risk

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

    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. Investing

    Unlevered Beta

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

    The Capital Asset Pricing Model: an Overview

    CAPM helps you determine what return you deserve for putting your money at risk.
  5. 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.
  6. Trading

    Bettering Your Portfolio With Alpha And Beta

    Increase your returns by creating the right balance of both these risk measures.
  7. 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.
  8. Investing

    Beta: Know The Risk

    Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here.
  9. Investing

    Beta: Gauging Price Fluctuations

    Learn how to properly use this measure that can help you meet your criteria for risk.
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  6. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
Trading Center