Submitted by nsscadmin on
Last week we discussed systemic risk. This week we continue our look at different types of risk by looking at systematic risk.
Systematic risk is risk that is inherent to the entire market and is often referred to as market risk. This type of risk affects the entire market and is not limited to one company or industry.
Risk that makes up systematic risk is typically beyond the control of businesses. This could include economic, political, and social factors. For example, a change in interest rates, a rise in inflation, or even something like a major weather event or pandemic makes up systematic risk. They are beyond the control of business, but have a major impact or can cause major harm to the overall economy and markets.
Systematic risk is nearly impossible to predict and very difficult to completely avoid when investing. Diversification can mitigate and reduce potential losses to protect you from systematic risk, but because it affects the entire market is nearly impossible to avoid it completely.
To learn more about risk, including some of the types of risk that interact with both systemic and systematic risk please review our previous post on risk tolerance.