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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.
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.

• Total Variance = (Beta^2 * Benchmark Variance) + Standard Error

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.

### Video

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.

### Quiz

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

True

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

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

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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