What is "systematic risk"?

Systematic risk refers to the inherent risk that affects the entire financial market or a broad range of assets, rather than being limited to a specific sector or investment. This type of risk is caused by factors that impact the overall economic environment, such as changes in interest rates, inflation, political instability, or natural disasters. Systematic risk is unavoidable and cannot be mitigated through diversification within a portfolio; it is often measured by the market’s overall volatility or beta.

Understanding systematic risk is crucial for investors because it helps them assess how external factors might impact their investments or the market as a whole. This is in contrast to risks that are specific to individual stocks or sectors, which can often be managed through diversification strategies.