Systematic vs Unsystematic Risk
Whether you know it or not, the concept of risk can be broken down into two main classes; systematic and unsystematic risk. Systematic risk is market wide risk that is going to be applied to nearly all securities or stocks in the market. For example, systematic risk would be a terrorist attack that would affect the entire market no matter what industry or sector your trading in. This type of risk is completely unavoidable and cannot be managed or mitigated by investors because it is completely unforeseen. Unsystematic risk is risk that is specific to a particular company or industry. This could be risk to social media companies or mortgage companies in particular but don’t effect the entire market. This type of risk can be largely avoided by diversifying stock selection and underlying asset correlations.