Which term best describes non-diversifiable market risk?

• A. Systematic risk
• B. Unsystematic risk
• C. Credit risk
• D. Operational risk

Answer: (A)

Non-diversifiable market risk is systematic risk. This is the risk that comes from broad factors that affect almost all assets, such as shifts in interest rates, inflation, economic downturns, or major geopolitical events. Because these forces move the whole market, simply adding more securities to a portfolio doesn’t eliminate them. Diversification reduces idiosyncratic or unsystematic risk—the risk specific to one company or industry—but it can’t remove systematic risk. Asset owners often monitor this with measures like beta to gauge how much an asset tends to move with the market. In contrast, unsystematic risk is tied to individual companies or sectors and can be mitigated through diversification; credit risk concerns the possibility of a borrower defaulting, and operational risk relates to failures in processes or systems. Therefore, the term that best describes non-diversifiable market risk is systematic risk.