Updated July 21, 2023
Difference Between Systematic Risk vs Unsystematic Risk
Systematic risk can be defined as a type of total risk that arises as a result of various external factors such as political factors, economic factors, and sociological factors. Systematic risk is non-diversifiable in nature. This means that this type of total risk cannot be controlled or minimized or avoided by the management of an organization. A systematic risk has the tendency to disrupt not just the whole of the market but an economy too. The major sources of systematic risk are risks related to the market, purchasing power, and interest rate and the common examples of such type of risk are inflation, price movements, fluctuation in interest rates, rise in unemployment, etc.
On the other hand, unsystematic risk can be defined as a type of total risk that arises as a result of various internal factors taking place within an organization. Unsystematic risks are diversifiable in nature. This means that these types of risks can be controlled, minimized and even avoided by the management of an organization. Unsystematic risk has the tendency to disrupt the well being of an organization and sometimes the industry too. The major sources of such risks are risks pertaining to finances, business, and insolvency and the common examples of the same are a higher rate of operational costs, a rise in labor turnover, etc.
Head To Head Comparison Between Systematic Risk vs Unsystematic Risk(Infographics)
Below are the Top 9 comparison between Systematic Risk vs Unsystematic Risk:
Key Differences Between Systematic Risk vs Unsystematic Risk
The key differences between systematic risk vs unsystematic risk are as follows:
- Systematic risks are uncontrollable in nature. Unsystematic risks are controllable in nature.
- Systematic risks are non-diversifiable whereas unsystematic risks are diversifiable.
- Systematic risks cannot be controlled, minimized, or eliminated by an organization or industry as a whole. On the other hand, unsystematic risks can be easily controlled, minimized, regulated, or avoided by the organization.
- Systematic risks are a result of external factors. These types of risks take place due to macro-economic factors i.e. political, social, and economic factors. On the other hand, unsystematic risks are a result of internal factors taking place in an enterprise. In other words, these types of risks take place as a result of microeconomic factors.
- Systematic risks have the potential to put an entire industry or an overall economy into total distress whereas unsystematic risks have the potential to put an organization into distress.
- The types of systematic risks are interest risk, inflation risk, purchasing power risk, and market risk whereas the types of unsystematic risks are financial risk and business-specific risk.
- Systematic risks are unavoidable in nature whereas unsystematic risks are avoidable in nature.
- When it comes to hedging, systematic risk is concerned with the proper allocation of the assets while the unsystematic risk is concerned with portfolio diversification.
- Examples of systematic risk are inflation, rise in unemployment rates, the higher rate of poverty, corruption, changes in the interest rates, change in price rates, etc whereas the examples of unsystematic risk are high rate of employee turnover, employee strike, higher costs of operational activities, manipulation of financial statements, etc.
- Beta is used for the measurement of systematic risk or in other words, it is an indicator of systematic risks. On the other hand, unsystematic risks cannot be measured with the help of a particular tool. It is measured by means of getting the systematic risk subtracted from the total risk.
Risk vs Unsystematic Risk Comparision Table
Given below are the Major Difference between systematic risk vs unsystematic risk:
| Basis of Comparison |
Systematic Risk |
Unsystematic Risk |
| Meaning | Risks that are uncontrollable in nature and arise out of external factors like political, economic, and sociological are regarded as systematic risks. | Risks that are controllable in nature and arise out of organizational (or internal) factors are regarded as unsystematic risks. |
| Nature | Systematic risks are the risks that are uncontrollable in nature. In other words, these types of risks are non-diversifiable in nature, i.e. it cannot be minimized, controlled, or eliminated by the management of an organization. | Unsystematic risks are totally controllable in nature. In other words, these types of risks are diversifiable in nature, i.e. it can be easily minimized, controlled, or even eliminated by the management of an organization. |
| Factors responsible | Systematic risks take place due to external factors or macro-economic factors. These external factors can be sociological, economic, or even political too. | Unsystematic risks take place due to internal or organizational or micro-economic factors. |
| Measurement | Systematic risks are measured by Beta. | Unsystematic risks are not measured or indicated with the help of any tool. However, unsystematic risks can be measured by subtracting systematic risks from the total risk. |
| Impacts | Systematic risks can impact the industry, market and the overall economy too. | Unsystematic risks can impact only a certain organization or a particular industry. |
| Sources | The major sources of systematic risks are:
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The major sources of unsystematic risks are:
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| Examples | Examples of systematic risks are as below:
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The examples of unsystematic risks are as below:
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| Protection / Hedging | Concerned with the assets allocation. | Concerned with the portfolio diversification. |
| Types | The two types of systematic risks are interest risk, inflation risk, and market risk. | The two types of unsystematic risks are financial risk and business-specific risk. |
Conclusion
Total risk comprises two types of risks that include risk- systematic risk and unsystematic risk. The Systematic risk is broader in comparison to the unsystematic risk. Systematic risk is a result of various external or macro-economic factors like political, social, and economic whereas unsystematic risk is a result of factors that are internal or microeconomic in nature. Systematic risks are uncontrollable while unsystematic risks can be easily controlled and taken care of with proper implementation of required strategies. Systematic risk cannot be minimized or eliminated whereas unsystematic risk can be minimized or eliminated.
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