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Fincash » Systematic Risk

Systematic Risk

Updated on October 17, 2020 , 1575 views

What is Systematic Risk?

Systematic risk is the risk inherent to the entire market or market segment. Systematic risk is also known as undiversifiable risk, volatility, or market risk affects the overall market. Systematic risk is the risk caused by macroeconomic factors within an economy and are beyond the control of investors or companies. This risk causes a fluctuation in the returns earned from risky investments. 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 correct Asset Allocation strategy.

systematic-risk

Systematic risk incorporates interest rate changes, Inflation, recessions and wars, among other major changes. Shifts in these domains have the ability to affect the entire market and cannot be mitigated by changing around positions within a portfolio of public equities.

Systematic Risk Formula

Systematic risk + Unsystematic risk = Total risk

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Unsystematic risk is the risk that something with go wrong on the company or industry level, such as mismanagement, labor strikes, production of undesirable products, etc.

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