There are many types of financial risk. To put it simply, theoretically, investment risk affecting asset values are in the two classes. The first one is systematic risk and the second one is unsystematic risk. In other words, investors are actually prone to both risk systematically or unsystematically. Systematic risk or market risk is a risk affecting the whole economic market. It generally affects a large percentage of the total market. Thus, market risk is the loss of investment due to political risk and macroeconomic risk.
Risks like volatility, market risk and undiversifiable risk are also systematic risks. Because, there are risks affecting the overall market, not only some stock or industry. Unfortunately, systematic risk is unpredictable, worse, it is impossible to avoid. Mitigation through diversification cannot help also. But it is still possible to identify it by hedging or using asset allocation strategy. The epitome would be, if an investor placed too much pressure on cybersecurity stocks, there is still a chance for diversification. For example, investors would invest in a range of stocks in other sectors like healthcare and infrastructure.
On the other hand, many aspects involving macroeconomics such as inflation, recessions, wars, interest rates could affect systematic risks. Changing positions within a portfolio of public equities still cannot mitigate those shifts affecting the entire market. Managing systematic risk means investors should make sure that a variety of asset classes are in the portfolios. Those are like real estate, fixed income, and cash that would respond differently towards systematic shifts.
