2.18 Systematic Risk (Market Risk)
Systematic risk affects the entire financial system simultaneously. Diversifying across 100 common stocks does not eliminate market risk.
Key FINRA Exam Takeaways
- Systematic Risk: Market-wide risk that affects ALL securities; CANNOT be eliminated through diversification.
- Types: Market risk, Interest rate risk, Inflation (Purchasing Power) risk, Currency/Exchange rate risk.
- Measured by Beta: Beta of 1.0 moves in tandem with the S&P 500; Beta > 1.0 is more volatile than market.
- Hedging: Systematic risk can be hedged using index options (e.g. buying SPX puts).
Interactive Knowledge Checkpoint • Section 2.18
Which of the following risks CANNOT be eliminated or significantly reduced through portfolio diversification?