Systematic risk, also known as market risk or undiversifiable risk, refers to risks that affect

the entire financial market or a broad segment of it, rather than a single asset or industry.
These risks cannot be eliminated through diversification. The main types of systematic risk
include:

1. Market Risk

The risk of losses due to overall market declines (e.g., stock market crashes, bear markets).

Affects all securities to some degree.

2. Interest Rate Risk

The risk that changes in interest rates will affect investment values.

Particularly impacts bonds (inverse relationship between bond prices and interest rates)
and interest sensitive stocks (e.g., utilities, financials).

3. Inflation Risk (Purchasing Power Risk)

The risk that rising inflation will erode the real value of investments.

Fixed income investments (like bonds) are especially vulnerable.

4. Currency Risk (Exchange Rate Risk)

The risk that fluctuations in foreign exchange rates will affect investments in international
markets.

Impacts multinational companies, foreign bonds, and global portfolios.

5. Political Risk (Geopolitical Risk)

The risk that political instability, government policy changes, or geopolitical events (e.g.,
wars, trade sanctions) will negatively impact markets.

Examples include Brexit, U.S.China trade wars, and regulatory changes.

6. Recession Risk (Economic Risk)

 The risk of an economic downturn reducing corporate earnings and asset prices.

Affects all sectors, though cyclical industries (e.g., automotive, luxury goods) are hit
harder.

7. Liquidity Risk (Market Liquidity Risk)

The risk that an entire market faces a lack of buyers/sellers, making it difficult to exit
positions without significant losses.

Seen during financial crises (e.g., 2008 housing crash).

Here are some additional examples of systematic risk that impact broad markets or entire
economies:

8. Global Pandemic Risk

Example: COVID19 (2020) caused worldwide market crashes, supply chain disruptions,
and economic slowdowns.

Affected nearly all sectors (travel, retail, oil, tech).

9. Commodity Price Shocks

Example: Oil price crashes (2014, 2020) hurt energy stocks, airlines, and oil dependent
economies (e.g., Russia, Saudi Arabia).

Rising oil prices (e.g., 2022 Ukraine war) increased inflation globally.

10. Sovereign Debt Crises

Example: European Debt Crisis (2010–2012) led to market turmoil, bank failures, and
recession fears across the Eurozone.

Countries like Greece, Spain, and Italy faced soaring bond yields.

11. Central Bank Policy Shifts

 Example: The U.S. Federal Reserve raising interest rates (2022–2023) caused stock and
bond markets to decline.

Tightening monetary policy reduces liquidity, hurting growth stocks.

12. Systemic Banking Crises

Example: 2008 Financial Crisis (Lehman Brothers collapse) led to a global credit crunch,
stock market crashes, and recessions.

Even well diversified portfolios suffered losses.

13. Trade Wars & Protectionism

Example: U.S.China Trade War (2018–2020) increased tariffs, disrupted supply chains, and
hurt global markets (e.g., semiconductors, agriculture).

14. Climate Change & Natural Disasters

Example: Increasing hurricanes, wildfires, or floods can disrupt entire industries

(insurance, agriculture, energy) and raise costs economywide.

15. Technological Disruption

Example: The rise of AI (2020s) threatens job markets, traditional industries (e.g., media,
customer service), and creates regulatory risks.

16. Regulatory & Tax Policy Changes

Example: Stricter antitrust laws (e.g., against Big Tech) or higher capital gains taxes can
depress market valuations.

17. Demographic Shifts

Example: Aging populations (Japan, Europe) strain pension systems, reduce workforce
growth, and slow economic expansion.
These risks are unavoidable through diversification because they impact the entire system.
Investors manage them by:

Hedging (e.g., gold, Bitcoin, or inverse ETFs during crises).

Asset allocation (bonds as a hedge against stock downturns).

Staying informed on macroeconomic trends.

Unlike unsystematic risk (which is specific to a company or industry), systematic risk cannot
be diversified away. Investors often hedge against it using strategies like:

Diversifying across asset classes (stocks, bonds, real estate, commodities).

Using derivatives (options, futures).

Investing in defensive sectors (e.g., healthcare, utilities) during downturns.

Types of Unsystematic Risk

Unsystematic risk (or specific risk) in India refers to risks that affect individual companies,
sectors, or industries rather than the entire market. These risks can be mitigated through
diversification. Below are the key types with Indian examples:

1. Business Risk

Definition: Risks from operational inefficiencies, competition, or demand shifts.

Indian Examples:

Kingfisher Airlines (2012) – Collapsed due to high debt, mismanagement, and falling
demand.

Vodafone Idea (Vi) – Struggles due to intense competition from Jio and Airtel.

2. Financial Risk

Definition: Risks from high debt, poor cash flow, or liquidity crises.

Indian Examples:
 Yes Bank (2020) – Near collapse due to bad loans and liquidity crunch (RBI had to
intervene).

DHFL (2019) – Went bankrupt due to excessive debt and fraud allegations.

3. Operational Risk

Definition: Risks from internal failures, fraud, or supply chain disruptions.

Indian Examples:

PNB Scam (2018) – ₹14,000 crore Nirav Modi fraud hit Punjab National Bank.

Tata Nano’s failure – Production delays and poor marketing led to its downfall.

4. Legal & Regulatory Risk

Definition: Risks from lawsuits, fines, or sudden policy changes.

Indian Examples:

Cairn Vedanta Tax Dispute (201421) – Retrospective tax demand led to legal battles.

Flipkart Walmart (2020) – Faced CCI scrutiny over alleged anticompetitive practices.

5. Management Risk

Definition: Risks from poor leadership, governance issues, or scams.

Indian Examples:

Satyam Scam (2009) – Ramalinga Raju’s ₹7,000 crore accounting fraud.

IL&FS Crisis (2018) – Mismanagement led to a ₹91,000 crore debt default.

6. IndustrySpecific Risk

Definition: Risks affecting a particular sector (e.g., regulatory changes, tech disruption).

Indian Examples:

Telecom Sector (201920) – AGR dues crisis hurt Vodafone Idea, Airtel.

Real Estate (201620) – RERA & demonetization hit DLF, Unitech, and others.
7. Credit Risk (Default Risk)

Definition: Risk of a company failing to repay loans/bonds.

Indian Examples:

Reliance Communications (2019) – Defaulted on ₹46,000 crore debt.

Jet Airways (2019) – Bankruptcy due to unpaid loans and operational losses.

8. Reputation Risk

Definition: Damage to brand image leading to customer & investor loss.

Indian Examples:

Maggi Noodles Ban (2015) – Nestlé India’s sales crashed due to lead contamination
claims.

Patanjali’s False Ads (2024) – Supreme Court fines eroded consumer trust.

How Indian Investors Can Reduce Unsystematic Risk?

Diversify across sectors (e.g., IT, Pharma, FMCG, Banking).

Avoid overexposure to debt heavy companies (e.g., some infra & realty stocks).

Monitor corporate governance (e.g., check promoter pledging, auditor resignations).

Use mutual funds/ETFs for broader exposure.

Would you like case studies on how Indian investors lost/gained due to these risks?