What distinguishes 'systematic' risk from 'unsystematic' risk?

What distinguishes 'systematic' risk from 'unsystematic' risk?

• A. Systematic risk is controllable, while unsystematic risk is not.
• B. Systematic risk affects the overall market, while unsystematic risk is specific to a company.
• C. Unsystematic risk is irrelevant in finance.
• D. Systematic risk is always higher than unsystematic risk.

Answer: (B)

The distinguishing feature of systematic risk is that it affects the entire market or a broad class of assets rather than being confined to a particular security or industry. This type of risk is influenced by factors such as economic changes, political events, and natural disasters that have widespread implications, impacting overall market performance. In contrast, unsystematic risk is specific to an individual company or industry. This could include factors like management decisions, competitive dynamics, or operational issues that do not impact the broader market. Investors can often mitigate unsystematic risk through diversification, spreading their investments across a range of assets or sectors. Recognizing this difference is crucial for risk assessment, as it informs strategies for managing and hedging different types of risks in an investment portfolio. Systematic risk, being inherent to the market, cannot be eliminated solely through diversification, while unsystematic risk can be reduced by holding a diversified portfolio.

The distinguishing feature of systematic risk is that it affects the entire market or a broad class of assets rather than being confined to a particular security or industry. This type of risk is influenced by factors such as economic changes, political events, and natural disasters that have widespread implications, impacting overall market performance.

In contrast, unsystematic risk is specific to an individual company or industry. This could include factors like management decisions, competitive dynamics, or operational issues that do not impact the broader market. Investors can often mitigate unsystematic risk through diversification, spreading their investments across a range of assets or sectors.

Recognizing this difference is crucial for risk assessment, as it informs strategies for managing and hedging different types of risks in an investment portfolio. Systematic risk, being inherent to the market, cannot be eliminated solely through diversification, while unsystematic risk can be reduced by holding a diversified portfolio.