Systematic Risk

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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.

Browse the definition and meaning of more terms similar to Systematic Risk. The Management Dictionary covers over 7000 business concepts from 6 categories. This definition and concept has been researched & authored by our Business Concepts Team members.

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