Marketing Essay on Systematic Risk – Systematic risk can only be minimized by hedging or employing the proper asset allocation strategy, not through diversification. Furthermore, systematic risk refers to the risk that exists throughout the whole market or market sector.
The overall risk that is intrinsic to the financial market or a complete sector and is not particular to individual equities is known as systematic risk.
What is Systematic Risk?
Systematic risk is also known as undiversifiable risk in economics since it cannot be avoided by diversifying across sectors in the event of a financial market crisis.
The difference between systematic risk and systemic risk is that the latter refers to a single unforeseeable incident that affects the global economy whereas the former refers to common elements that create volatility.
On the other hand, a worldwide recession that leads stock markets to decline is an example of systemic risk. While systematic risk is unavoidable, investors may mitigate it by diversifying their investments among a variety of asset types, such as stocks, bonds, real estate, and cash savings, since their returns will differ if there is a big systematic shift.
Changes in these areas can have a big influence on the market, and they can’t be fixed by changing the holdings in a public stock portfolio.
To mitigate systematic risk, investors should diversify their portfolios by including fixed income, cash, and real estate, all of which would respond differently in the case of a large systemic shift.
If investors feel executive teams are cutting down on spending, an increase in interest rates, for example, may boost the value of some new-issue bonds while depressing the value of some company shares.
On the other hand, if interest rates rise, having a sufficient quantity of income-producing assets in a portfolio will help to offset the value loss in some shares.