Glossary of Terms

Systematic Risk 2019-01-15 08:00:00

Systematic Risk

The uncertainty caused by macroeconomic factors that affect all risky assets. Also known as “market risk”, systematic risk underlies the performance of most asset classes that trade publicly or privately. One can not diversify against systematic risk, as it includes events such as inflation, changes in interest rates, recessionary periods, and even war. These type of forces tend to affect the market as a whole, and typical portfolio diversification strategies may not be as effective.

Systematic risk can partially offset through correct asset allocation strategies and hedging. By investing in assets with low correlation to the overall market, or a beta below 1, volatility caused by the overall market can be smoothed. Hedging may also remedy systematic risk, as derivatives such as futures can help offset price volatility of currencies and commodities if employed correctly.