Which statement about systematic risk is true?

Which statement about systematic risk is true?

• A. True
• B. False
• C. Only with hedging
• D. Can always be eliminated

Answer: (A)

Systematic risk is the market-wide risk that affects nearly all assets. It stems from macro factors like economic growth, inflation, interest rates, and geopolitical events. Because these factors move the entire market, diversification cannot eliminate this risk—the portfolio will still be exposed to market swings, even if you hold a broad mix of securities. What you can do to manage systematic risk is hedge or reduce market exposure (for example, using derivatives or moving into lower-beta assets, or even a risk-free position), but you cannot remove it entirely through diversification alone. That’s why the correct statement is that systematic risk is true in the sense that it cannot be eliminated by diversification.

Systematic risk is the market-wide risk that affects nearly all assets. It stems from macro factors like economic growth, inflation, interest rates, and geopolitical events. Because these factors move the entire market, diversification cannot eliminate this risk—the portfolio will still be exposed to market swings, even if you hold a broad mix of securities. What you can do to manage systematic risk is hedge or reduce market exposure (for example, using derivatives or moving into lower-beta assets, or even a risk-free position), but you cannot remove it entirely through diversification alone. That’s why the correct statement is that systematic risk is true in the sense that it cannot be eliminated by diversification.