What does systematic risk refer to?

Systematic risk refers to the inherent risk associated with the entire market or a broad segment of the market, which cannot be eliminated through diversification. This type of risk is influenced by macroeconomic factors that affect all investments, such as changes in interest rates, inflation, economic recessions, and geopolitical events. Because systematic risk impacts the entire market rather than a specific asset or industry, investors cannot reduce their exposure to this risk through diversification strategies, which generally aim to mitigate specific, idiosyncratic risks associated with individual assets.

The other options involve risks that can be controlled or influenced to some extent. For instance, risks associated with individual asset variances deal with specific risks tied to particular investments, which are generally diversifiable. Hedging is a strategy used to mitigate certain risks—primarily those that are idiosyncratic—rather than systematic risks. Lastly, while interest rates can indeed be a component of systematic risk, limiting the definition to interest rates alone does not encompass the broader economic factors that contribute to systematic risk across various asset classes and markets.