How do systematic and unsystematic risks differ?

Systematic risk refers to the potential for losses due to factors affecting the entire market or economy, such as economic downturns, political instability, or changes in interest rates. These risks are inherent to the entire market and cannot be diversified away. Investors are exposed to systematic risk through their investments in the overall market, and it is often associated with events that affect all securities in the market simultaneously.

On the other hand, unsystematic risk is unique to a specific company or industry. This could involve factors such as management decisions, competitive pressures, or specific events related to that company, which can impact its stock price independently of the broader market movements. Unsystematic risk can be mitigated or reduced through diversification; holding a varied portfolio of assets can help offset the negative impact of any single investment.

Thus, option B accurately captures the distinction between the two types of risk, highlighting that systematic risk is driven by market-wide events, while unsystematic risk is specific to particular companies or sectors. This understanding is crucial for investors as it informs their risk management strategies and portfolio construction.