Systematic risk
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
Risk that cannot be diversified away because it affects all assets; priced by the market.
Systematic risk in plain English
Some risks hit just one company (a factory fire, a bad CEO), and you can protect yourself from those by spreading your money across many different investments — if one sinks, others float. Systematic risk is the kind you CAN'T escape that way, because it hits basically everything at once: recessions, wars, big interest-rate swings, a market-wide crash. Since no amount of spreading-out can erase it, investors demand extra reward for bearing it — that's what "priced by the market" means. It's like carrying an umbrella: it helps against one rain cloud, but it can't save you from a hurricane that floods the whole town.
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide