Systematic Risk:

Question

Systematic Risk:

BlackTom AI · Accepted Answer

Systematic risk is the portion of total risk that affects the entire market or large segments of it, so it “Affects all stocks simultaneously.”

1) Relevant knowledge points and concepts
- Systematic (market) risk vs. unsystematic (idiosyncratic) risk: systematic risk arises from economy-wide factors (recessions, interest-rate changes, political events) while unsystematic risk is firm- or industry-specific.
- Capital Asset Pricing Model (CAPM): only systematic risk (measured by beta) is rewarded with a risk premium, because investors can diversify away idiosyncratic risk.
- Diversification and hedging: diversification eliminates unsystematic risk but not systematic risk; hedging can reduce exposure but does not change the fundamental definition used in CAPM.

2) Step-by-step reasoning
- Step 1: Identify the source of systematic risk: macro events affecting market returns.
- Step 2: Observe that these events move many stocks together; therefore the risk “affects all stocks simultaneously.”
- Step 3: Because it is common to all investments, holding a diversified portfolio cannot remove it—diversification only reduces firm-specific risk.
- Step 4: CAPM and empirical finance state investors demand a premium for bearing non-diversifiable risk (market premium × beta).

3) Intermediate logical steps
- If risk affects all firms, covariance between asset returns and the market is nonzero → that component cannot be averaged away by holding many assets → it is non-diversifiable → it commands a risk premium.

4) Why the correct answer is correct
- “Affects all stocks simultaneously” matches the defining characteristic of systematic (market) risk: economy- or market-wide shocks that move most asset returns together and cannot be eliminated by diversification.

5) Why the other options are incorrect
- “Can be eliminated through diversification.” Incorrect: diversification removes idiosyncratic risk, not systematic risk.
- “Doesn't require risk premium.” Incorrect: because systematic risk is non-diversifiable, investors require compensation (risk premium) for bearing it (CAPM).
- “Can be hedged.” Misleading/incorrect in this context: while financial instruments (futures, options) can reduce exposure to market movements, hedging is distinct from diversification and the textbook definition treats systematic risk as the non-diversifiable component that commands a premium; the multiple-choice intent is that systematic risk cannot be eliminated by simple portfolio diversification.

Conclusion: The correct choice is “Affects all stocks simultaneously,” which matches the provided answer.

Systematic Risk:单项选择题

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