{"id":2827,"date":"2019-09-01T11:00:00","date_gmt":"2019-09-01T11:00:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2827"},"modified":"2026-01-28T10:24:23","modified_gmt":"2026-01-28T10:24:23","slug":"systematic-non-systematic-risks","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/portfolio-management\/systematic-non-systematic-risks\/","title":{"rendered":"Systematic and Non-systematic Risks"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Portfolio Risk and Return \u2013 Part II (2025 CFA\u00ae Level I Exam \u2013 Portfolio Management \u2013 Learning Module 2)\",\n  \"description\": \"This CFA\u00ae Level I Portfolio Management lesson covers Portfolio Risk and Return \u2013 Part II. The video connects the efficient frontier to the Capital Allocation Line (CAL) and Capital Market Line (CML), explains systematic versus nonsystematic risk, develops intuition for beta, and applies CAPM and the Security Market Line to security selection. It concludes with performance evaluation tools including the Sharpe ratio, Treynor ratio, M\u00b2, and Jensen\u2019s alpha, with a strong focus on exam-relevant applications.\",\n  \"uploadDate\": \"2022-07-02\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/OCZddCJ_HwM\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=OCZddCJ_HwM\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/OCZddCJ_HwM\",\n  \"duration\": \"PT54M58S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which statement best describes systematic risk?\",\n    \"text\": \"Which statement best describes systematic risk?\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Systematic risk cannot be diversified, and investors are compensated for this risk. Because it affects the entire market, it cannot be eliminated through diversification, and investors earn returns for bearing it.\"\n    }\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/OCZddCJ_HwM\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><br \/>\nSystematic risk is inherent in the overall market and cannot be avoided. Non-systematic risk is limited to a particular asset class or security and can be avoided through appropriate portfolio&nbsp;diversification.<\/p>\n<h2><strong>Systematic Risk<\/strong><\/h2>\n<p>When you invest in a market, you face systematic risk. This risk is tied to market conditions like interest rates, inflation, and politics, among others. You can&#8217;t escape systematic risk, but if you use leverage, it can make it even riskier.<\/p>\n<h2><strong>Non-systematic Risk<\/strong><\/h2>\n<p>Non-systematic risk is limited to a particular asset class or security and is a function of the &#8220;idiosyncrasies&#8221; of a particular asset. Investors can avoid non-systematic risk through portfolio diversification. A diversified portfolio reduces exposure or reliance on any one underlying security or asset class.<\/p>\n<h2><strong>Pricing of Risk<\/strong><\/h2>\n<p>When an asset has both systematic and non-systematic risk, and we expect to be compensated for both, it makes sense to diversify. Diversification means spreading your investments across different assets that don&#8217;t move together. This way, you can reduce or eliminate the non-systematic risk, leaving you with only the systematic risk.<\/p>\n<p>Even if an investor eliminates non-systematic risk, they wouldn&#8217;t be compensated. If they kept adding more non-systematic risk, they&#8217;d eventually get zero expected return. So, we can&#8217;t assume investors will be rewarded for non-systematic, diversifiable risk. In an efficient market, there&#8217;s no extra reward for taking this kind of risk.<\/p>\n<p>Therefore, only the systematic risk is priced and compensated for, while non-systematic risk does not generate any return. It is, therefore, an investor&#8217;s interest to diversify the non-systematic risk element within a portfolio.<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>Which statement <em>best<\/em> describes systematic risk?<\/p>\n<p>A. Systematic risk can be diversified, and investors are not compensated for this risk.<\/p>\n<p>B. Systematic risk cannot be diversified, and investors are compensated for this risk.<\/p>\n<p>C. Systematic risk can be diversified, and investors are not compensated for this risk.<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B<\/strong>.<\/p>\n<p>You can&#8217;t diversify systematic risk because it&#8217;s market-related. Investors get rewards for taking systematic risks. However, they don&#8217;t get compensated for non-systematic, diversifiable risk, which they should spread across various assets in their portfolios.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Systematic risk is inherent in the overall market and cannot be avoided. Non-systematic risk is limited to a particular asset class or security and can be avoided through appropriate portfolio&nbsp;diversification. Systematic Risk When you invest in a market, you face&#8230;<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7],"tags":[],"class_list":["post-2827","post","type-post","status-publish","format-standard","hentry","category-portfolio-management","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Systematic vs. Non-Systematic Risk | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Understand systematic and non-systematic risks, their impact on portfolios, and how investors are compensated for market risk.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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