What is Systematic Risk?
Systematic risk also known as systemic risk, market risk and un-diversifiable risk is risk which applies to whole market or market segment. It is opposite to idiosyncratic risk which applies to specific stocks or other financial products. Often systematic risk results in declining of total portfolio investment value as all/most portfolio investments declines in value.
Systematic risks often originate from political or economical problems, wars, interest rate changes, and calamities. They are usually hard to avoid; and avoidance steps should come from higher authorities like governments. Usually systematic risks cannot be minimized by diversification of investment in a particular market segment; but may be by investing in different market segments, because the factors causing the risk affect different market segments differently. The major ways to reduce these risks are avoiding investments, reducing investments and hedging investments.
Systematic risks often trigger a chain reaction in an economy. They necessitate change of plans and strategies by governments, companies, banks, financial markets and individual portfolios. Systematic risks are also a major cause for failure of banks. The beta value of a stock gives information about the systematic risk it faces.
Systematic risks often originate from political or economical problems, wars, interest rate changes, and calamities. They are usually hard to avoid; and avoidance steps should come from higher authorities like governments. Usually systematic risks cannot be minimized by diversification of investment in a particular market segment; but may be by investing in different market segments, because the factors causing the risk affect different market segments differently. The major ways to reduce these risks are avoiding investments, reducing investments and hedging investments.
Systematic risks often trigger a chain reaction in an economy. They necessitate change of plans and strategies by governments, companies, banks, financial markets and individual portfolios. Systematic risks are also a major cause for failure of banks. The beta value of a stock gives information about the systematic risk it faces.
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posted by Daniel Pipitone at
5:52 AM
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