Systematic Risk
Market-wide risk that cannot be eliminated through diversification.
What is Systematic Risk?
Systematic risk — also called market risk or undiversifiable risk — is the inherent risk affecting the entire market or broad economy, which cannot be reduced by holding a diversified portfolio. Sources include recessions, interest rate changes, geopolitical events, and pandemics. All assets are affected to some degree. Beta measures a security's sensitivity to systematic risk: a beta of 1.5 means a stock moves 1.5% for every 1% move in the overall market. Since investors cannot diversify away systematic risk, they require a premium for bearing it, as described by the Capital Asset Pricing Model (CAPM).
Example
During the COVID-19 crash of February–March 2020, virtually all stocks fell simultaneously regardless of how diversified the portfolio was — a clear demonstration that systematic risk cannot be eliminated through diversification.