Systematic risk (also called market risk) is the risk that affects the entire market — you cannot diversify it away. Recessions, interest rate changes, inflation, pandemics, wars, and political crises are systematic risks. When the market crashes, even well-diversified portfolios lose value.
The opposite — unsystematic risk (company-specific risk) — can be diversified away. If one company in your portfolio fails, others compensate. But systematic risk? No amount of diversification helps when the entire market falls. The COVID crash of March 2020 wiped 34% off the S&P 500 in just 23 trading days — no stock was spared.
Beta (β) measures a stock's sensitivity to systematic risk. Beta of 1.0 = moves with the market. Beta > 1.0 = more volatile (tech stocks often have beta of 1.3-1.5). Beta < 1.0 = less volatile (utilities typically 0.4-0.6). The CAPM model uses beta to calculate expected returns: investors should be compensated more for bearing higher systematic risk.