Investors are basically prone to systematic and unsystematic risks. There are significant differences between systematic and unsystematic risks. 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. Unsystematic risk has many names such as unsystematic risk, diversifiable risk, residual risk, as well as specific risk. But why is it a specific risk? The reason is because this risk happens to particular companies and industries.
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. It is on the other hand different from unsystematic risk. Unsystematic risk happens when uncertainty occurs in a company or industry’s portfolio. The epitome of unsystematic risk is a new competitor owning significant market share from the invested company in the marketplace. Another reason could be a regulatory change leading to the downfall of company sales. Then, there coils also be a product recall resulting from the management shift in the company.
You can identify systematic risk 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. Investors could take action by diversifying the portfolio for unsystematic risk.