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Trading and Investment Terms

Systematic Risk

Systematic risk is that part of the total risk that is caused by factors beyond the control of a specific company or individual. 

Systematic risk is caused by factors that are external to the organization. 

 

All investments or securities are subject to systematic risk and, therefore, it is a non-diversifiable risk. 

 

It cannot be diversified away by holding a large number of securities.

 

Types of Systematic Risk

Systematic risk includes 

Market risk

Interest rate risk

Purchasing power risk

Exchange rate risk.

Systematic risk occurs due to macroeconomic factors. 

It is also called market risk or non-diversifiable or volatility risk as it is beyond the control of a specific company or individual, and hence, can’t be diversified.

Systematic risk can partially be mitigated by asset allocation. Owning different asset classes with low correlation can smooth portfolio volatility because asset classes react differently to macroeconomic factors. When some asset categories (i.e. domestic equities, international stocks, bonds, cash, etc.) are increasing others may be falling and vice versa.

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