What type of risk is referred to as systematic risk?

Systematic risk, also known as market risk, encompasses risks that affect the entire market or economy rather than individual companies or sectors. This type of risk is inherent to the overall financial system and cannot be eliminated through diversification, as it can impact all investments across the board. Systematic risk includes factors such as economic downturns, political instability, changes in interest rates, and global events that have widespread implications.

The correct answer highlights that this risk is associated with the entire market segment, which distinguishes it from specific risks that might affect only particular companies or industries. Understanding systematic risk is important for investors because it influences the overall market performance and is a key consideration when assessing the risk-return profile of investments. Effective strategies to manage systematic risk typically involve asset allocation and hedging techniques rather than diversification alone.