What is "systematic risk"?

Systematic risk, also known as market risk, refers to the risk that affects the overall market or a significant portion of it, rather than being tied to a specific company or industry. This type of risk is inherent in the market and arises from broader economic factors, such as interest rate changes, inflation, or geopolitical events, that can impact all securities to some extent.

Investors cannot eliminate systematic risk through diversification; diversifying a portfolio primarily helps to mitigate unsystematic risk, which is the risk unique to individual companies or industries. Therefore, systematic risk remains after diversification is applied. It influences the entire market and is a crucial consideration for investors when evaluating their overall risk exposure in their portfolios. Understanding this type of risk is essential for developing strategies that account for market-wide fluctuations.