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NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return

In the context of investment risk, which of the following best describes 'systematic risk'?

Systematic risk is market-wide risk driven by macro factors such as interest rates, inflation and economic conditions. It affects all securities and cannot be eliminated by diversification, unlike company-specific unsystematic risk, which can be reduced by holding a diversified portfolio of securities.

  1. ARisk arising from factors that affect the whole market and cannot be removed by diversificationCorrect
  2. BRisk specific to one company that can be removed by holding many stocks
  3. CRisk that a borrower fails to repay interest on time
  4. DRisk arising only from a change in a company's management

Explanation

Systematic risk, also called market risk, stems from macro factors such as interest rates, inflation and economic cycles. It affects all securities, so diversification cannot eliminate it. The option describing company-specific risk refers to unsystematic risk, which diversification can reduce.

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