What is the difference between systematic and unsystematic risk?


Quick Answer

Systematic risk refers to the uncertainty inherent to the entire financial market or segment, whereas unsystematic risk comes with a certain industry or company, according to Investopedia. Systematic risk is affected by daily market volatility and can be circumvented by shuffling investments from one sector to another. Unsystematic risk can be reduced by diversification of investments across many sectors of the economy.

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Full Answer

Systematic risk is also known as market risk or undiversifiable risk. This type of risk cannot be eliminated by diversifying assets. Systematic risk indicates how a particular investment in a diversified portfolio contributes to the overall risk of a company's financial investing. An example of systematic risk occurs when the entire economy goes down due to factors across all sectors and not just when the stock market goes down. Daily fluctuations of stock prices are another example of systematic risk.

Unsystematic risk is also known as specific risk, residual risk or diversifiable risk. Pearson Higher Education reveals this is a portion of a company's overall risk that can be eliminated by including this risk in a diversified portfolio of assets. One example of an unsystematic risk occurs when a strike affects a company or a sector of a portfolio, according to Investopedia.

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