Systematic risk is best described as which of the following?

Systematic risk is best described as which of the following?

• A. Risk that affects the entire market and cannot be diversified away
• B. Risk unique to a single company that can be diversified away
• C. Liquidity risk of an asset
• D. Currency risk only in international investments

Answer: (A)

Systematic risk is the market-wide risk that cannot be diversified away. It arises from factors that affect the entire economy or broad swaths of the market, such as changes in interest rates, inflation, economic growth, or major geopolitical events. Because these factors move many assets together, attempting to diversify across many stocks won’t eliminate this risk. That’s why the best description is the risk that affects the entire market and cannot be diversified away. The other options describe risks that are specific to individual companies (which diversification can reduce), liquidity risk (ease of trading, not broad market risk), and currency risk (exchange rate movements tied to international investing, not the generalized market-wide risk in itself).

Systematic risk is the market-wide risk that cannot be diversified away. It arises from factors that affect the entire economy or broad swaths of the market, such as changes in interest rates, inflation, economic growth, or major geopolitical events. Because these factors move many assets together, attempting to diversify across many stocks won’t eliminate this risk.

That’s why the best description is the risk that affects the entire market and cannot be diversified away. The other options describe risks that are specific to individual companies (which diversification can reduce), liquidity risk (ease of trading, not broad market risk), and currency risk (exchange rate movements tied to international investing, not the generalized market-wide risk in itself).