Difference between Systematic and Unsystematic Risk

While investing in a stock market one need to take into account two types of risks one is systematic and other is unsystematic risk. Let’s look at the difference between the two of them –

Systematic risk refers to the risk which affects the whole stock market and therefore it cannot be reduced or diversified away. For example any global turmoil will affect the whole stock market and not any single stock, similarly any change in the interest rates affect the whole market though some sectors are more affected then others. This type of risk is called non diversifiable risk because no amount of diversification can reduce this risk.;

Unsystematic risk is the extent of variability in the stock or security’s return on account of factors which are unique to a company. For example it may be possible that management of a company may be poor, or there may be strike of workers which leads to losses. Since these factors affect only one company, this type of risk can be diversified away by investing in more than one company because each company is different and therefore this risk is also called diversifiable risk.

6 comments… add one
  • yashashwini

    I Want the answers for what is the differences between systematic and unsystematic risk in Finance Management

    • Vinish

      I have already discussed that in the above post

      • Ramya

        Distinguish between systematic and unsystematic risk with suitable examples…In Financial Management.

        Plz help me in this regard..I wnt to write my M.Com Assignment..Plz snd reply to my mail Id.

  • chaithrika

    Distinguish between systematic and unsystematic risk with suitable examples in finacila managagement.pls help within 2 day.I want perfect answer to this.pls send rply to my mail Id

  • chaitra

    plz send me the differance between systematic and unsystematic risk

  • kunal raj

    Systematic risk affects the entire market as a whole, while unsystematic risk may affect a certain company or sector. Therefore, the latter is avoidable, while the former isn’t.

    One can diversify an investment portfolio to eliminate the endemic risk that plagues a certain sector. However, one cannot eliminate systematic risk as its effects sweep the entire economy, as well as the market. To really anticipate systematic risk, one needs to study the dynamics of an economy and the effects of policy decisions quite deeply. While this may not help you entirely eliminate systematic risk, it may help you brace for it.

    One can keep unsystematic risk to a minimum with thorough stock research and spreading out investment over diverse sectors, but its unsystematic counterpart, simply cannot be eliminated entirely. It cannot be taken out of the equation entirely and therefore, it should never be ignored. Make your investments smartly, by taking both these risks into consideration

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