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Systematic risk and non-systematic risk are two fundamental concepts in the study of Security Analysis and Portfolio Management. These risks are integral to understanding how investments behave under various economic and market conditions. The distinction between these two types of risk helps investors make better-informed decisions about diversification and portfolio construction. Systematic risk, also referred to as market risk, is the type of risk that affects the entire market or a broad segment of the market. This risk is non-diversifiable, meaning it cannot be eliminated through diversification of a portfolio. Systematic risk arises from macroeconomic factors such as changes in interest rates, inflation, recessions, political instability, natural disasters, pandemics, or global events that influence all securities in the market. Because these factors are external to individual companies or industries, even a well-diversified portfolio will still be vulnerable to them. For instance, if there is a significant increase in the interest rate by a central bank, the overall stock market may decline, affecting virtually all ___ ______ ________ _______ ________ ___ _____.
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