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What is Systematic Risk?

Systematic risk is the broad risk of fluctuations and downturns in the market as a whole, which it is said cannot be eliminated through diversification.

Systematic risk is also known as market risk, which is the exposure of all investors to the broad movements and downturns of the market as a whole. Theoretically it cannot be controlled for through simple diversification, since that would only bring a portfolio closer to the broad market performance, with a Beta closer to 1.

Individual securities or a smaller portfolio with a Beta other than 1 will experience what’s known as idiosyncratic risk, which is the risk of random movement outside of market movements.

Hedging is the practice of attempting to eliminate even systematic risk through positions in derivatives and alternative assets which may behave in a contrarian fashion to the rest of the market or portfolio.

Keywords: hedging, alternative investments, diversification, Beta, market risk, systematic risk, Diversification Score®, market exposure,