What does systematic risk refer to?

Systematic risk refers to the overall risk associated with market fluctuations that affect all securities and cannot be eliminated through diversification. It encompasses events that impact the entire market or economy, such as changes in interest rates, inflation, political instability, or economic recessions.

This type of risk is inherent to the entire market and is unpredictable; hence, even a well-diversified portfolio is still subject to its effects. Investors cannot avoid systematic risk by diversifying their assets. Understanding this concept is crucial for investors as it helps them to assess the broader economic factors that may influence their investment returns.

Other options reflect different types of risks. Individual investment decline is related to unsystematic or specific risk, which affects only a particular stock or sector. Risks tied to certain industries represent systematic risk only if they impact the entire market, not just that sector. Lastly, risk typical to non-systematic investments describes risks that can be mitigated by diversification, unlike systematic risk.