What differentiates systematic risk from unsystematic risk?

Systematic risk is characterized by its impact on the overall market rather than specific securities or sectors. It includes factors such as changes in economic policies, interest rates, inflation, and geopolitical events that affect all investments across the board. Because it involves widespread phenomena, investors cannot eliminate systematic risk through diversification; it is inherently tied to market movements.

On the other hand, unsystematic risk pertains to risks that are unique to a specific company or industry. For instance, factors such as management decisions, product recalls, or competitive pressures can create unsystematic risks that can be mitigated through diversification in an investment portfolio.

In summary, systematic risk fundamentally influences the entire market, making it an unavoidable aspect of investing, while unsystematic risk is more specific and can be managed through a diversified approach to investment selection.