What does systematic risk refer to?

Systematic risk refers to the potential for losses that affect the entire market or economy broadly, rather than being limited to a specific company or sector. This type of risk arises from general economic factors such as interest rates, inflation, or geopolitical events that can trigger widespread volatility across all investments. Since systematic risk is inherent to the market as a whole, it cannot be mitigated through diversification, meaning that even a well-diversified portfolio will be subjected to this type of risk.

In contrast, other types of risk, like those affecting only specific companies or sectors (as suggested in the first option), are referred to as unsystematic risk. These risks can often be managed through careful investment choices and diversification strategies tailored to particular industries or companies. The focus of systematic risk on broad market movements underscores its importance in investment strategies and portfolio management, as it emphasizes the potential for widespread economic impacts that investors must take into account.