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Systemic risk is generally used in reference to an event that can trigger a collapse in a certain industry or economy, whereas systematic risk refers to overall market risk. Systemic risk does not have an exact definition, many have used systemic risk to describe narrow problems, such as problems in the payments system, while others have used it to describe an economic crisis that was triggered by failures in the financial system. Generally, systemic risk can be described as a risk caused by an event at the firm level that is severe enough to cause instability in the financial system.On the other hand, systematic risk does have a more recognized and universal definition. Sometimes plainly called market risk, systematic risk is the risk inherent in the aggregate market that cannot be solved by diversification. Some common sources of market risk are recessions, wars, interest rates and others that cannot be avoided through a diversified portfolio. Though systematic risk cannot be fixed with diversification, it can be hedged. Also, the risk that is specific to a firm or industry and can be solved by diversification is called unsystematic or idiosyncratic risk. (See our article Offset Risk With Options, Futures And Hedge Funds to learn ways to hedge systematic risk.)As an example of systemic risk, the collapse of Lehman Brothers in2008 caused major reverberations throughout the financial system and the economy. Lehman Brother's size and integration in the economy caused its collapse to result in a domino effect that caused a major risk to the financial system in the U.S.
What Does Systematic Risk Mean? The risk inherent to the entire market or entire market segment. Also known as "un-diversifiable risk" or "market risk."Investopedia explains Systematic Risk Interest rates, recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Systematic risk can be mitigated only by being hedged. Even a portfolio of well-diversified assets cannot escape all risk. Unsystematic Risk Mean; Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through appropriate diversification. Also known as "specific risk", "diversifiable risk" or "residual risk".
Unsystematic Risk For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is considered to be unsystematic risk.
A systamatic risk is a coming step prophesied unlike unsystamatic risk it comes and go at anytime and unpredictable further steps are considered
