What differentiates systematic risk from unsystematic risk?

Systematic risk is characterized as the risk inherent to the entire market or a market segment, which cannot be eliminated through diversification. It is influenced by macroeconomic factors that affect all companies, such as changes in interest rates, inflation rates, political instability, or economic recessions. Therefore, any events that impact the economy broadly will also impact the securities and markets overall.

On the other hand, unsystematic risk is unique to a specific company or industry. It can arise from factors such as management decisions, product recalls, or competitive pressures that do not affect the overall market. This type of risk can be mitigated through diversification, as it is possible to hold different investments whose unique risks do not correlate with one another.

In summary, systematic risk is tied to factors that influence the entire market, while unsystematic risk is specific to individual companies, making the distinction clear and emphasizing the broader impact of systematic risk on market volatility and investment portfolios.