What is the primary difference between systematic and unsystematic risk?

The primary difference between systematic and unsystematic risk is that systematic risk affects the entire market. This type of risk is linked to broader economic factors such as interest rates, inflation, or political events that influence the overall market performance. As a result, systematic risk cannot be mitigated through diversification, since it impacts all investments and asset classes simultaneously.

In contrast, unsystematic risk is the risk that is specific to a particular company or industry. This includes factors like a company's management decisions, operational issues, or competitive position. Unlike systematic risk, unsystematic risk can often be reduced through diversification, as an investor can hold a variety of investments to lessen the impact of any one company's poor performance.

Therefore, the focus on systematic risk affecting the entire market highlights its pervasive nature, which is a critical concept for investors when considering their investment strategies and the overall stability of their portfolios. Understanding this distinction helps investors to manage risk effectively, ensuring they are prepared for market-wide downturns that can affect all investments.