Systematic Risk (Market Risk) vs Unsystematic Risk (Specific Risk)
Risk affecting the whole market that diversification cannot remove. Company- or industry-specific risk that diversification can eliminate.
What is the difference between Systematic Risk (Market Risk) and Unsystematic Risk (Specific Risk)?
Systematic = market-wide, undiversifiable, compensated. Unsystematic = company-specific, diversifiable, uncompensated.
| Systematic Risk (Market Risk) | Unsystematic Risk (Specific Risk) | |
|---|---|---|
| In one line | Risk affecting the whole market that diversification cannot remove. | Company- or industry-specific risk that diversification can eliminate. |
| Example | In March 2020 nearly every equity sector fell together; owning 60 stocks did not help. | One stock at 40% of a portfolio drops 60% on an accounting scandal; an index holder barely notices. |
| Unit | Risk & Return | Risk & Return |
| Series 65 | Section 1: Economics & Business | Section 1: Economics & Business |
What is Systematic Risk (Market Risk)?
Recessions, rate shocks, wars, pandemics - risks that hit every asset at once. Because it cannot be diversified away, it is the risk investors are compensated for bearing. Beta measures exposure to it.
What is Unsystematic Risk (Specific Risk)?
A failed drug trial, a fraud, a plant fire. Because it can be diversified away at near-zero cost, the market does not pay you to hold it - which is the theoretical case against concentrated positions.