Which risk is associated with the overall market movements that affect many investments?

• A. Credit risk
• B. Systematic risk (market risk)
• C. Specific risk (idiosyncratic)
• D. Liquidity risk

Answer: (B)

Systematic risk is the risk that moves with the whole market and affects many investments at once. It stems from broad economic factors—like shifts in interest rates, inflation, or a recession—that influence nearly all assets. Because these forces impact the market as a whole, you can’t eliminate this risk just by Diversifying widely; it’s inherent to investing in a market economy. You can hedge or offset some of it with strategies that target overall market movements, but it can’t be removed entirely.

By contrast, credit risk concerns a borrower’s ability to repay a loan, liquidity risk is the difficulty of selling an asset quickly at a fair price, and specific (idiosyncratic) risk affects only particular companies or industries and can be reduced through diversification. The risk described here is the market-wide kind—systematic risk.