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Systematic Risk Definition, Calculation and Quiz

Like its uncorrelated partner specific risk, this one has many names, a regression-based calculation and a huge impact on financial risk management.
  1. Define - Learn what systematic risk is and how to calculate it.
  2. Context - Use systematic risk in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 18, 2021
Be prepared to hear colleagues call this many different names. See examples below.

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Using Systematic Risk to Monitor Investment Risk


Systematic Risk is a measure that quantifies volatility for a stock, but only the component related to the Market, or common factor risks that represent the Market, meaning it is uncorrelated with the company's stock specific risk.

Synonyms: non-diversifiable risk, market risk, common factor risk, common source risk.

Systematic Risk is separated from specific risk in a single-variable (Market) or multi-variable (multi-factor) linear regression. It can be computed for any of the three timeframes: historical, expected or forecast, but is mostly used in risk forecasting applications like portfolio optimization.

In the formula above, if you have a stock's total variance, benchmark variance, beta and standard error from the regression you can isolate the second term in parentheses which is the systematic variance. The Beta^2 above means beta is squared.

For context, it is common to review the percent of systematic risk relative to total risk to get a feel for how closely related a stock's return stream was to its benchmark. A related measure R-Squared helps with this interpretation.

Systematic risk is called non-diversifiable risk because by holding many stocks in a portfolio specific risk can be reduced, and all that is left over is the systematic risk associated with the ups-and-downs of the stock market, or benchmark, itself.

In a Sentence

Ted:  So systematic risk is also called non-diversifiable, common factor and market risk?
Eve:  Yep, there's a lot of job security in risk management.


Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.

Videos can also be accessed from our YouTube Channel.

Video Script

If this term had a video, the script would be here.


Click box for answer.

The residual or error term in a linear regression is required to separate specific risk from systematic risk. | True or False?


Stocks with higher R-Squared have lower systematic risk. | True or False?

False. High R-Squared translates to a higher proportion of systematic risk.

Questions or Comments?

Still unclear on the Systematic Risk? Check out the Quant 101 Series, specifically Stock portfolio risk decomposition into systematic and specific risk.

Related Terms

Our trained humans found another term in the category risk decomposition you may find helpful.

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/ factorpad.com / fin / glossary / systematic-risk.html

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