What is systematic risk?

The term systematic risk is also known as undiversifiable risk or market risk, and refers, as the name suggests, to the financial asset that is publicly traded and its risk cannot be reduced. This type of risk depends a lot on the situation of the market in which we find ourselves, since there will be markets that have more risks than others that do not.

The concept of systematic risk together with that of unsystematic risk they form what is known as total risk. The total risk refers to the probability in which a loss of money or values ​​can occur. The decomposition would be:

Total risk = Systematic risk + Non-systematic risk

To be able to calculate the systematic risk, we must do so through the beta of the financial asset (a sensitivity measure used to know how the profitability of an asset varies relatively depending on a reference stock index, such as the Ibex 35).

In order to reduce this risk, we must act on beta, and for this to happen we must not operate in the market or we must not acquire any security, which would reduce the uncertainty that we have about the asset. To work on this, we must introduce into our portfolio financial assets whose risk contains a low beta. Although this will depend on the objectives that we have set, since otherwise it would not make sense to select this type of assets.

La portfolio diversification it is the most viable option to reduce unsystematic risk and thus will also reduce overall risk. This comes in handy if we have high beta financial assets but we want to have those assets in our portfolio, having the need to diversify (keeping these assets) and look for other solutions.

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