In finance, what does "systematic risk" refer to?

In finance, what does "systematic risk" refer to?

• A. The risk associated with a specific company.
• B. The overall market risk affecting all investments.
• C. The risk of liquidity in trading.
• D. The volatility of interest rates only.

Answer: (B)

Systematic risk refers to the risk inherent to the entire market or a segment of the market. It encompasses factors that affect the overall market environment, such as economic changes, political events, natural disasters, and changes in interest rates. Unlike specific risks that affect only a single company or industry, systematic risk is unmanageable and cannot be diversified away through portfolio diversification. This means that all investments can be affected by systematic risk, making it a critical concept for investors to understand in terms of overall market performance. Understanding systematic risk is essential for making informed investment decisions, as it illustrates how broader economic and market dynamics can impact investment returns.

Systematic risk refers to the risk inherent to the entire market or a segment of the market. It encompasses factors that affect the overall market environment, such as economic changes, political events, natural disasters, and changes in interest rates. Unlike specific risks that affect only a single company or industry, systematic risk is unmanageable and cannot be diversified away through portfolio diversification. This means that all investments can be affected by systematic risk, making it a critical concept for investors to understand in terms of overall market performance.

Understanding systematic risk is essential for making informed investment decisions, as it illustrates how broader economic and market dynamics can impact investment returns.