Systematic risk and systemic risk are two different creatures, as each relates to a completely different scope. Systematic risk is defined as the risk inherent to the broader market. Systematic risk, also known as undiversifiable risk, volatility risk, or market risk, relates to and impacts the overall market, not just a particular segment or industry. It represents a potential risk to the entire economy and financial system, in the form of financial risks that arise in a market and impacts all players involved in the market.

By nature, systematic risk cannot be mitigated by a mere diversification as all available components of a diversification strategy would be exposed thereto. Hence, the only means for mitigation of such risk is risk transfer mechanisms (paid protection) and hedging. Notwithstanding, a market player exposed to systematic risk will still be at risk. Systematic risk features a complete correlation with the entire market or market segment. It may also be referred to as volatility, as it is impossible to completely avoid, simply due to its unpredictability.

On the other hand, systemic risk constitutes a type of risk that reflects the probability that cumulative losses will arise from an event that triggers a series of successive losses related to a number of systemically important financial institutions or markets belonging to the same system or closely related systems. The successive losses hit in a fashion of pervasive chain effect. The trigger event leads to a cascade of shocks and instability affecting other financial institutions and/ or markets, and could escalate into an economic shock or institutional failure in a specific sector of the economy (e.g., the financial sector).