Definition
Systematic risk affects all securities in a market—interest rate changes, recessions, geopolitical events, pandemics. It cannot be diversified away because it moves all assets in the same direction. Beta measures a security's exposure to systematic risk. CAPM states that only systematic risk is compensated with higher expected returns.
lightbulb Example
During a recession, nearly all stocks decline regardless of individual company quality. A well-diversified portfolio of 500 stocks still falls 30% because systematic risk (the recession) affects the entire market simultaneously.
verified_user Key Points
- Affects the entire market—cannot be diversified away
- Measured by beta
- Only systematic risk is compensated (per CAPM)
- Examples: recession, rate changes, pandemics