Explained: Systematic and unsystematic risk
A portfolio generally consists of two kinds of risks and everyone should be thoroughly informed about them.
Asset prices essentially carry volatility on daily basis which mostly is driven by market conditions rather than fundamentals and hence, known as market risk as well. The meltdown in the Indian markets between August 2008 and March 2009 is a good example to explain systematic risk. It is for the same reason investors are told to go for asset allocation.
For anyone with dislike towards volatility it’s recommended to stay away from such assets (with high systematic risks) as such risks can’t be calculated in advance. You should beware of making investments in assets like equity, commodities or forex.
Beta is a measure of systematic risk and is an indicator of volatility of a price of security in comparison of the entire market as a whole. If beta is higher than 1 then it indicates that the particular security has a risk profile higher in comparison of the market and vice versa for value less than 1.
Exactly opposite unsystematic risk is much predictable and concerns specific industry or stock. The risk is linked to product launches, government regulations or announcements made by corporate which have a direct impact on the health of stock market. The risk can be easily diversified by diversifying portfolio across various stocks and sectors. But it’s difficult to avoid it completely.