Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
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.
Systematic Risk (Market Risk): a worked example
In March 2020 nearly every equity sector fell together; owning 60 stocks did not help.
What is the difference between Systematic Risk (Market Risk) and Unsystematic Risk (Specific Risk)?
Systematic = market-wide, undiversifiable, compensated. Unsystematic = company-specific, diversifiable, uncompensated.
Often confused with Unsystematic Risk (Specific Risk) - see Systematic Risk (Market Risk) vs Unsystematic Risk (Specific Risk) side by side.
More terms in Risk & Return
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.
Maximum Drawdown
The largest peak-to-trough decline over a period.