What does the term "systematic risk" refer to?

Systematic risk refers to the inherent risk associated with the overall market or a particular market segment that cannot be diversified away. This type of risk affects all companies and is influenced by macroeconomic factors such as changes in interest rates, inflation, political instability, or natural disasters. Because systematic risk is tied to the broader economic environment, it impacts a wide range of assets simultaneously, making it impossible for investors to eliminate this risk entirely through diversification.

In contrast, risks that can be eliminated through diversification are referred to as unsystematic risks. These are specific to individual companies or industries and can be managed by investing in a diverse portfolio of assets, thereby reducing exposure to any single investment's potential negative performance.