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Systematic Risk

Updated on March 8, 2023

Investors and traders are often known to take calculated risks that are an inherent part of any venture, industry, or sector. Systematic risks are unavoidable market risks that are often undiversifiable and are associated with the volatility of the market and the economy as a whole. These risks may be mitigated to a certain extent but not completely through strategic asset allocation or through hedging the investment portfolio.

Examples of systematic risks

These are some of the examples of systematic risks that could affect the entire markets rather than a particular sector or a company.

Macroeconomic factors like inflation, interest rate hikes, currency appreciation/depreciation.

Natural factors like a flood, earthquake, or the onset of a pandemic.

Social factors like the start of a war, civil unrest, terrorism, etc

Difference between systematic and unsystematic risks

Systematic risks and unsystematic risks are fundamentally different. Systematic risks cannot be avoided completely through systematic means of the entity. On the other hand, unsystematic risks are sector-specific or business specific and can be spread through effective financial planning.