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

Which of the following best describes systematic risk in an equity portfolio?

Systematic risk is market-wide risk driven by factors such as interest rates, inflation or economic conditions. It affects all securities to some extent and cannot be removed through diversification, unlike company-specific risk, which can be reduced by holding many unrelated stocks.

  1. ARisk that can be eliminated by holding a large number of unrelated stocks
  2. BRisk arising from market-wide factors that affects all securities to some degree and cannot be removed by diversificationCorrect
  3. CRisk arising only from a single company's management decisions
  4. DRisk of a borrower failing to repay a debt obligation

Explanation

Systematic (market) risk stems from economy-wide factors such as interest rates, inflation and policy changes. It affects all securities and remains even in a well diversified portfolio. Option A describes unsystematic risk, and option C is a company-specific risk.

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