How does geopolitical risk affect systematic risk?

Geopolitical risk significantly impacts systematic risk as it has the potential to disrupt markets and influence investor confidence on a global scale. When geopolitical tensions arise—such as conflicts, trade wars, or shifts in political leadership—markets react to the uncertainty these events create. This can lead to increased volatility in stock prices, affecting a wide range of industries and sectors across borders. Investors may become more cautious, leading them to pull back from investments, which further exacerbates market fluctuations and affects overall economic stability.

The nature of systematic risk means that it cannot be diversified away and is influenced by factors that affect the entire market, rather than just individual securities. Geopolitical events often encompass broader economic implications, such as changes in foreign policy, sanctions, or disruptions in international trade, which directly impact investor sentiment and contribute to shifts in systematic risk.

Other options, while they may describe potential outcomes of geopolitical risk, do not capture the broader implications on systematic risk in the same way. For instance, increased regulatory scrutiny may arise in some contexts, but it does not address the immediate impact on overall market stability or investor confidence. Similarly, while local companies can be affected by geopolitical risks, these risks generally have far-reaching effects that impact the global market. Therefore, the most