Systematic risk

unsystematic risknon-diversifiable risksystematic market riskunsystematic
In finance and economics, systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggregate income.wikipedia
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Modern portfolio theory

portfolio theoryportfolio analysismean-variance
In contrast, specific risk (sometimes called residual risk, unsystematic risk, or idiosyncratic risk) is risk to which only specific agents or industries are vulnerable (and is uncorrelated with broad market returns).
Systematic risk (a.k.a. portfolio risk or market risk) refers to the risk common to all securities—except for selling short as noted below, systematic risk cannot be diversified away (within one market).

Diversification (finance)

diversificationdiversifieddiversify
Due to the idiosyncratic nature of unsystematic risk, it can be reduced or eliminated through diversification; but since all market actors are vulnerable to systematic risk, it cannot be limited through diversification (but it may be insurable).
Synonyms for non-diversifiable risk are systematic risk, beta risk and market risk.

Capital asset pricing model

CAPMCapital Asset Pricing Model (CAPM)CAPM model
Hence, the capital asset pricing model (CAPM) directly ties an asset's equilibrium price to its exposure to systematic risk.
The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Beta (finance)

betabeta coefficient beta coefficient
An important concept for evaluating an asset's exposure to systematic risk is beta.
Beta is also referred to as financial elasticity or correlated relative volatility, and can be referred to as a measure of the sensitivity of the asset's returns to market returns, its non-diversifiable risk, its systematic risk, or market risk.

Idiosyncrasy

idiosyncraticidiosyncrasiesidiosyncratic risk
In contrast, specific risk (sometimes called residual risk, unsystematic risk, or idiosyncratic risk) is risk to which only specific agents or industries are vulnerable (and is uncorrelated with broad market returns).
For instance, in a complete market in which the capital asset pricing model holds, the price of a security is determined by the amount of systematic risk in its returns.

Hedge (finance)

hedginghedgehedged
For countries or regions lacking access to broad hedging markets, events like earthquakes and adverse weather shocks can also act as costly aggregate risks.
To protect your stock picking against systematic market risk, futures are shorted when equity is purchased, or long futures when stock is shorted.

Finance

financialfinancesfiscal
In finance and economics, systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggregate income.

Economics

economiceconomisteconomic theory
In finance and economics, systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggregate income.

Financial market

financial marketsmarketmarkets
In finance and economics, systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggregate income.

Stochastic

stochasticsstochastic musicstochasticity
If every possible outcome of a stochastic economic process is characterized by the same aggregate result (but potentially different distributional outcomes), the process then has no aggregate risk.

Complete market

completecomplete set of state-contingent marketsmarket completeness
In some cases, aggregate risk exists due to institutional or other constraints on market completeness.

Robert J. Shiller

Robert ShillerBob ShillerShiller
Robert Shiller has found that, despite the globalization progress of recent decades, country-level aggregate income risks are still significant and could potentially be reduced through the creation of better global hedging markets (thereby potentially becoming idiosyncratic, rather than aggregate, risks).

Globalization

globalisationglobalizedglobal
Robert Shiller has found that, despite the globalization progress of recent decades, country-level aggregate income risks are still significant and could potentially be reduced through the creation of better global hedging markets (thereby potentially becoming idiosyncratic, rather than aggregate, risks).

Futures exchange

futures marketfuturesfutures markets
Specifically, Shiller advocated for the creation of macro futures markets.

Asset allocation

allocationasset classasset classes
Systematic risk plays an important role in portfolio allocation.

Risk-free interest rate

risk-free raterisk free raterisk-free asset
Risk which cannot be eliminated through diversification commands returns in excess of the risk-free rate (while idiosyncratic risk does not command such returns since it can be diversified).

United States Treasury security

Treasury billsTreasury securitiesTreasury bond
This investor is vulnerable to systematic risk but has diversified away the effects of idiosyncratic risks on his portfolio value; further reduction in risk would require him to acquire risk-free assets with lower returns (such as U.S. Treasury securities).

Fiscal policy

fiscalfiscal policiesfiscal management
Fiscal, monetary, and regulatory policy can all be sources of aggregate risk.

Monetary policy

monetarymonetary policiesexpansionary monetary policy
Fiscal, monetary, and regulatory policy can all be sources of aggregate risk.

Regulation

regulationsregulatorygovernment regulation
Fiscal, monetary, and regulatory policy can all be sources of aggregate risk.

Terms of trade

terms-of-tradeexport competitivenessexport-to-import ratio
Small economies can also be subject to aggregate risks generated by international conditions such as terms of trade shocks.

Credit rationing

financial constraints
Banks may respond to increases in profitability-threatening aggregate risk by raising standards for quality and quantity credit rationing to reduce monitoring costs; but the practice of lending to small numbers of borrowers reduces the diversification of bank portfolios (concentration risk) while also denying credit to some potentially productive firms or industries.

Concentration risk

Banks may respond to increases in profitability-threatening aggregate risk by raising standards for quality and quantity credit rationing to reduce monitoring costs; but the practice of lending to small numbers of borrowers reduces the diversification of bank portfolios (concentration risk) while also denying credit to some potentially productive firms or industries.

Budget constraint

budget lineconstraintsendowment
Modelers often incorporate aggregate risk through shocks to endowments (budget constraints), productivity, monetary policy, or external factors like terms of trade.

Productivity

productiveproductivity growtheconomic productivity
Modelers often incorporate aggregate risk through shocks to endowments (budget constraints), productivity, monetary policy, or external factors like terms of trade.