2.3. Investment Risks

Typically, investment risk is divided into two broad categories, with the various types of investment risk we discuss falling into one of these categories. Systematic risk is investment risk that affects all investments or all investments of a certain broad type. For example, rising interest rates are generally considered a systematic risk for fixed-rate investments.

Nonsystematic risk, also called unsystematic risk, is investment risk that affects particular investments. Nonsystematic risk can be reduced by diversification. The amount of nonsystematic risk in a portfolio depends on the number of securities in the portfolio and the correlations among the securitie