Systematic risk refers to the type of risk that affects the entire market or a large segment of it, rather than being tied to a specific company or industry. It is often called “market risk” because it arises from factors that are outside the control of individual businesses and cannot be eliminated through diversification. This makes it an important concept for investors, as even a well-diversified portfolio remains exposed to systematic risk.

Key sources of systematic risk include economic recessions, inflation, interest rate changes, political instability, global conflicts, and natural disasters. For example, if a central bank raises interest rates, borrowing costs rise across the economy, affecting most companies’ profits and investors’ willingness to take risks. Similarly, geopolitical tensions or global financial crises can impact markets worldwide, regardless of a company’s performance.

Investors measure systematic risk through the concept of “beta,” which compares the volatility of a stock or portfolio to the overall market. A higher beta means greater sensitivity to market movements, while a lower beta indicates less exposure.

While systematic risk cannot be avoided, it can be managed. Strategies such as asset allocation, hedging with derivatives, or investing in less volatile asset classes may reduce its impact. Ultimately, understanding systematic risk helps investors make informed decisions and prepare for market-wide fluctuations.