Systematic Risk

Because it cannot be diversified away, systematic risk is the only risk investors are compensated for bearing — that is the central claim of the capital asset pricing model, and it is why beta rather than total volatility appears in the discount rate. Holding a hundred stocks removes company-specific risk but leaves market risk untouched, which is why every diversified equity portfolio falls together in a crash. The only ways to reduce it are to hold less equity, to hedge with derivatives, or to diversify across asset classes whose correlations differ. In a severe crisis correlations rise toward one, so even that last defence weakens exactly when it is needed.