What does 'systematic risk' refer to in financial markets?

Systematic risk, often called market risk, refers to the inherent risk that affects the entire market or a significant segment of the market simultaneously. This type of risk arises from factors that impact the overall economic environment, such as changes in interest rates, inflation, political instability, or broad economic shocks. Since it affects all securities in the market to some degree, it cannot be mitigated through diversification—individual investors cannot avoid this risk by holding a diversified portfolio.

In contrast, the other options describe forms of risk that are more localized or specific. The risk that is specific to individual stocks targets the performance of a particular company rather than the overall market, while the risk stemming from regulatory changes pertains to specific sectors or industries affected by new regulations. Finally, the risk of default by a single borrower is concerned with credit risk unique to an individual entity, distinct from the broader systemic factors influencing the entire market. Thus, systematic risk is specifically about the risks that permeate through entire markets, making it pivotal in understanding overall market dynamics.