Key differences between Systematic and Unsystematic Risk

- Systematic risk, also known as market risk or undiversifiable risk or uncontrollable risk, affects
the whole market and cannot be avoided through diversification, as compared to Unsystematic
risk, which is also referred to as controllable risk, specific risk or diversifiable risk, and which is
associated with specific, particular security, company, industry;

- While Systematic Risk involves those risks which are normally caused by macroeconomic factors
like interest rates, recession, wars, social, political factors, changes in government policies,
natural disaster, national and international economies, Unsystematic Risk, on the other hand,
involves those risks caused by microeconomic factors in the organization which can be avoided
if necessary action taken by the organization;

- Systematic Risk is mainly associated with the day to day fluctuations in stock's price and can
affect a large number of securities in the market, unlike Unsystematic Risk, which affects those
of a particular market only;

- Systematic Risk may be eliminated through hedging, asset allocation and diversification, while
Unsystematic Risk with portfolio diversification;

- The three main types of Systematic Risk are Interest risk, Inflation risk and Market risk,
compared to Unsystematic Risk, which include Business risk and Financial risk. These risks can
be briefly described as hereunder:
i. Interest risk - those risk originated by fluctuations in the rate of interest and thereby affect
the investors;
ii. Inflation risk - they are those risk which affect the value of money and purchasing power;
iii. Market risk - those risk which affect the price of stock;
iv. Business risk - those risk which make the company perform below average. For instance
changes in government policies, changes in taste preference, technological change;
v. Financial risk - also known as leveraged risk - caused by changes in capital structure of the
company.