Systematic Risk Characteristics

Systematic Risk Characteristics

Systematic risk characteristics can be explained in terms of market risk, no diversification, and reason for high return.

1.    Market Risk

Systematic Risk relates to whole market. The name systematic also suggests that it is part of a system. This risk is suffered by whole market. Market securities are subject to this risk, beta factor for market portfolio represent this risk.

2.     No Diversification

Systematic risk cannot be reduced by diversification. Systematic risk relates to market, and therefore every entity has to suffer that risk. This risk can only be reduced by reducing the market securities and increasing risk free security in your investment portfolio.

3.    High Return

Investor wants high return due to systematic risk suffered by them. We know that unsystematic risk can be diversified or reduced, so main reason for high return is systematic risk. This high return is represented by Risk premium.

4.    Vary

Systematic risk varies security to security. A security may have higher risk than average market risk; similarly a security may have lower risk than average market risk.