What is systematic risk?

Systematic risk refers to the inherent risk that affects the overall market or a particular market segment, rather than just individual assets. This type of risk is also known as market risk, as it encompasses factors that can influence the entire economic environment, such as changes in interest rates, inflation, political events, or natural disasters.

Unlike risks that are specific to individual assets—like a company's poor earnings report, which can affect only that stock—systematic risk cannot be mitigated through diversification. Even a well-diversified portfolio is susceptible to systematic risk because it impacts all securities to varying degrees. Understanding this distinction is crucial for investors, as it highlights the importance of considering the broader economic factors that can affect their investments.

In addition, systematic risk is what differentiates it from liquidity risk, which relates to the ease of buying or selling an asset without significantly affecting its price, or specific risk associated with individual securities. Thus, the identification of systematic risk is essential for effective investment strategy and risk management.