What is meant by 'systematic risk' in the financial market?

Systematic risk refers to the inherent risk that affects the entire market or a significant segment of the market. It encompasses factors that can impact all investments, such as economic downturns, political instability, changes in interest rates, or natural disasters. This type of risk is often contrasted with unsystematic risk, which is more specific to individual companies or industries.

The significance of systematic risk lies in its ability to impact a broad range of assets simultaneously, making it impossible to eliminate through diversification alone. Unlike risks that can be mitigated by holding a well-diversified portfolio of assets (which are more about specific sectors or companies), systematic risk remains and affects all investments collectively. Therefore, investors need to be aware that even a diversified portfolio can still be susceptible to changes in overall market conditions.