Series 82: 3.4.3.1. Systematic And Nonsystematic Risk

3.4.3.1. Systematic and Nonsystematic Risk

A portfolio of securities is comprised of both systematic and nonsystematic risk (also called unsystematic risk). Systematic risk is the risk that the whole system (i.e., market) will drop, causing a drop in the performance of the portfolio. Systematic risk is also referred to as market risk. If the performance of a portfolio drops due to systematic risk, it has dropped because the whole market has dropped, not because of the performance of the specific stocks within the portfolio.

Nonsystematic risk is the risk that the value of the specific securities within the portfolio will decline due to factors specific to the companies issuing the security (e.g., a decline in the company’s Standard & Poor’s rating). The amount of nonsystematic risk in a portfolio depends on the number of securi