The risk that is 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.
The main types of systematic risk include market risk, interest rate risk, inflation risk, and exchange rate risk.
It is also known as aggregate risk.
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