Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

Systematic risk refers to the risk inherent to the entire market or market segment, which affects all investments regardless of the nature of the particular asset. This type of risk encompasses factors such as economic changes, political instability, interest rate fluctuations, and natural disasters, all of which can cause widespread impacts in the market that cannot be avoided through diversification.

Diversification is a strategy employed to mitigate nonsystematic risk, which is specific to individual companies or industries. By holding a diverse portfolio of investments, an investor can reduce their exposure to the unique risks associated with any single investment. However, systematic risk is not influenced by the composition of an investor's portfolio; it remains constant regardless of how many different assets are held.

In summary, systematic risk is a critical concept for investors to understand, as it is an unavoidable part of investing that impacts all assets and cannot be eliminated through diversification strategies.