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Definition: Systematic Risk
Systematic risk is the risk which affects the prices of almost all securities in the market. It is also called as ‘market risk’ or ‘un-diversifiable’ risk. The sources of this risk include interest rate, price changes, natural disasters etc. When such a factor hits the market, almost every security takes a beating although in different proportions.
In the Capital Asset Pricing Model (CAPM) equation to determine the rate of return of a stock, the market risk premium is given by Market Risk (RM) – Risk Free Rate (RRF). This Market Risk component is called as Systematic Risk.
This type of risk cannot be eliminated by simply holding a diverse portfolio because it affects the entire market. However it can be avoided to an extent by having securities which have historically slow change in the prices.