As you know from this article, Anna loves sports. Meanwhile, she did some market research and finally decided to buy 3 stocks of winfit. Winfit is a publicly listed company which sells all kind of sports equipment. Anna’s winfit favourite is the wearable smartwatch with an heart rate tracker. If you wonder why companies are publicly listed, check out this article.
While Anna did her research, she stumbled upon the terms systematic risk and found the following definition:
Systematic Risk is the general market risk. This systematic risk concerns the entire market and since it can’t be reduced by buying different stocks, this risk is also called “non-diversifiable risk”.
Everyone who invests in the market, assumes this general market risk. Systematic risk is caused by events, that influence the entire market such as wars, major political decisions or natural disasters. In the week after hurricane Irma hit Florida, the S&P 500 fell almost 2%. S&P 500 represents 500 large companies that are listed on the American Stock markets.
Anna asked herself “Does winfit really have the same systematic market risk as any other company? For example when Irma hits Florida, winfit might not be affected as much as insurance companies?”
And Anna was right. Only very few companies have the exact same systematic risk as the market does.
Beta measures the amount of systematic risk in an investment. It’s a measure for correlation between investment and market.
A Beta > 1 means that an investment has more systematic risk than the market.
A Beta < 1 means that an investment has less systematic risk than the market.
A Beta = 0 means that an investment has the same systematic risk as the market.
As previously mentioned, the term market refers to indices like S&P 500, DAX or Russell 2000. Continue reading, if you’d like to learn more about unsystematic risk.