Systematic risk does not just affect a particular stock or an industry; it affects the overall market. Systematic risk always exists because common unpredictable factors can affect the whole market. For example, economic and political factors are often unpredictable and can influence the overall market.

A good measure of systematic risk is the beta, which measures the volatility of a security compared to the overall market. Investors can use beta to measure which securities will be most affected by systematic risk.

Beta measures the systematic risk interest with a security or a portfolio relative to the market. Beta is calculated by measuring the covariance of market returns with a stock or a portfolio's return divided by the variance of the market return. The beta of a market is 1 and whether a security is greater or less than 1 can give investors a general idea of which securities will be most affected by systematic risk.

For example, suppose an investor is measuring the beta of a technology stock relative to the Nasdaq Composite. The investor calculates the beta of the technology stock to be 4. The stock is considered high beta because it is greater than 1. The movement of the technology stock will generally be in the same direction of the Nasdaq Composite, but with a higher magnitude.

Suppose the market has been experiencing a tech bubble over the past five years. However, investors are losing interest, and stock valuations revert to the mean. This causes the Nasdaq Composite to fall substantially. The securities and portfolios with a beta greater than 1.0, relative to the Nasdaq Composite, will be most affected by this systematic risk.

  1. How does beta measure a stock's market risk?

    Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >>
  2. 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 >>
  3. What does a mutual fund's beta coefficient measure?

    Evaluate the risk associated with a particular mutual fund by determining its beta coefficient, which illustrates the fund's ... Read Answer >>
  4. What are the differences between delta hedging and beta hedging?

    Learn about hedging strategies, how to delta and beta hedge a security and the difference between delta hedging and beta ... Read Answer >>
  5. How is the Capital Asset Pricing Model (CAPM) represented in the Security Market ...

    Learn about the capital asset pricing model and the security market line and how the model is used in the calculation and ... Read Answer >>
Related Articles
  1. Investing

    Beta: Know the Risk

    Beta says something about measuring price risk in stocks, but how much does it say about fundamental risk factors too?
  2. Investing

    What is beta, and how do I calculate it in Excel?

    Here, we'll compare the beta values obtained from financial sources and explain how to compute beta using Microsoft Excel.
  3. Investing

    Build Diversity Through Beta

    In conjunction with stock valuation ratios like the price-to-earnings ratio and the price-to-earnings-growth ratio, a stock's measure of volatility known as beta can help investors build a diversified ...
  4. Investing

    How To Calculate Beta Of A Private Company

    We explain two methods for calculating the beta of a private company.
  5. Investing

    The Capital Asset Pricing Model: an Overview

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

    Smart Beta: Can Low Beta Equal High Risk?

    Low beta may not necessarily mean low risk when it comes to some smart beta strategies.
  7. Investing

    5 High-Beta Stocks To Watch

    Check out five high-beta stocks that can help make your portfolio more exciting.
  8. Financial Advisor

    Smart Beta ETFs: Understanding the Risks

    Smart Beta ETFs have grown in popularity in recent years. These are the risks that advisors and their clients need to understand.
  9. Managing Wealth

    Avoid Future Shock By Protecting Your Portfolio With Futures

    Worried about protecting your portfolio of diversified stocks and assets? Using futures with correct strategies can help.
  10. Investing

    Using Smart Beta ETFs To Minimize Risk

    Some smart beta strategies may be better at limiting risk than critics allege.
  1. Beta

    Beta is a measure of the volatility, or systematic risk, of a ...
  2. Systematic Risk

    Systematic risk, also known as "market risk," is risk inherent ...
  3. International Beta

    Better known as "global beta", international beta is a measure ...
  4. Smart Beta

    Smart beta investing combines the benefits of passive investing ...
  5. Zero-Beta Portfolio

    A portfolio constructed to have zero systematic risk or, in other ...
  6. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return ...
Hot Definitions
  1. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  2. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  3. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  4. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  5. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
  6. Monero

    Monero is a digital currency that offers a high level of anonymity for users and their online transactions.
Trading Center