What is the difference between systematic risk & unsystematic risk? Which risk is more important?

systematic riskis the risk that effects the entire market (all industries ) , that can't be eliminated or avoided (undiversified) . Unsystematic riskthat related to a specific industry or product within the market that can be avoided or diversified . Unsystematic riskis more important because we can mitigate it , while we have nothing to do with systematic risk.

Systematic Risk- Something is external and uncontrollable which affects everybody / all organizations. This risk is at macro level. eg. Interest rates changes by central banks affects all organizations and cannot be controlled by investor. Systematic risk are shocks or uncertainty which could arise from government policy, international economic forces, or acts of nature.

Unsystematic risk is controllable by an organization and at micro level. Such risk affects specific individual or a particular organization.

 Unsystematic risk is the risk which applies to a single investment and is unique to each company’s shares. This risk can be reduced or eliminated by diversification. If an investor holding a well-diversified portfolio of investment in shares then unsystematic risk will be eliminated.

Systematic risk is also known as Market risk. It is the risk that cannot be diversified away by holding a well-diversified portfolio. It is the inherent risk of the business as some business is riskier or less risky than others. The amount of systematic risk in an investment varies between different types of investment. This risk is what affects the market as a whole rather than specific company shares. Systematic risk reflects market-wide factors such as the country’s rate of economic growth, corporate tax rates, interest rate etc. Since these markets-wide factors generally cause returns to move in the same direction they cannot cancel out. Therefore, systematic risk remains present in all portfolios.

 

It is important to eliminate unsystematic risk.