Systematic risk VS Unsystematic risk. Before knowing the key difference between systematic and unsystematic risk we must have some initial knowledge about these terms.
What is Systematic Risk?
Systematic risk can be defined as a type of total risk that arises as a result of various external factors such as political factors, economic factors, and sociological factors. Systematic risk is non-diversifiable in nature.
This means that this type of total risk cannot be controlled or minimized or avoided by the management of an organization.
A systematic risk has the tendency to disrupt not just the whole of the market but the economy too.
The major sources of systematic risk are risks related to the market, purchasing power, and interest rate, etc.
Common examples of such types of risk are inflation, price movements, fluctuation in interest rates, rise in unemployment, etc.
What is Unsystematic Risk?
Unsystematic risk can be defined as a type of total risk that arises as a result of various internal factors taking place within an organization. Unsystematic risks are diversifiable in nature.
This means that these types of risks can be controlled, minimized, and even avoided by the management of an organization.
Unsystematic risk has the tendency to disrupt the well-being of an organization and sometimes the industry too.
The major sources of such risks are risks pertaining to finances, business, insolvency, etc.
Common examples of the same are a higher rate of operational costs, a rise in labor turnover, etc.
Systematic Risk vs Unsystematic Risk
| BASIS FOR COMPARISON | SYSTEMATIC RISK | UNSYSTEMATIC RISK |
|---|---|---|
| Meaning | Systematic risk refers to the hazard which is associated with the market or market segment as a whole. | Unsystematic risk refers to the risk associated with a particular security, company or industry. |
| Nature | Uncontrollable | Controllable |
| Factors | External factors | Internal factors |
| Affects | Large number of securities in the market. | Only particular company. |
| Types | Interest risk, market risk and purchasing power risk. | Business risk and financial risk |
| Protection | Asset allocation | Portfolio diversification |
