What does 'systematic risk' refer to?

Systematic risk refers to the inherent risk that affects the entire market or a broad segment of the financial market. This type of risk is linked to factors that impact the overall economy, such as changes in interest rates, inflation, political instability, or natural disasters. Unlike idiosyncratic risk, which pertains to specific assets or companies, systematic risk cannot be mitigated through diversification, as it influences the entire investment landscape.

For example, during a financial crisis, most stocks and securities tend to decline in value regardless of their individual performances, illustrating that systematic risk impacts all market participants. This is a crucial concept in investment management, as understanding systematic risk helps investors make informed decisions about portfolio construction and risk management strategies.