Which factor does systematic risk commonly relate to?

Systematic risk is closely associated with external economic factors that influence the entire market rather than individual sectors or companies. This type of risk includes elements such as economic recessions, interest rate changes, inflation, natural disasters, and geopolitical events. Unlike company-specific issues or changes in consumer preferences, which are more localized and can be diversified away, systematic risk affects all securities in the market.

For example, a recession creates widespread uncertainty that can lead to falling stock prices across various industries, regardless of a company’s internal performance. This intrinsic link to broader economic factors means that systematic risk is something investors cannot eliminate simply through diversification. Understanding this distinction is crucial for financial professionals as they strategize risk management and investment approaches.