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Systematic risk

The part of an asset's risk that comes from the market as a whole, which cannot be removed by holding more names.

Systematic risk is what beta measures: sensitivity to a common factor such as the index, rates or the overall risk appetite. It is the residue that survives diversification, because every holding shares it.

The only ways to reduce it are to hold less exposure, to hedge it directly - short index futures, put spreads, see hedge-ratio - or to own assets whose relationship to the factor is genuinely different. Adding more correlated stocks does nothing; ten technology names and fifty technology names carry the same systematic exposure per dollar.

For a trader the practical version is simpler than the theory. Your book has a market-direction component, measurable as beta-weighted-delta, and on most days that component explains the majority of the profit and loss - regardless of how stock-specific the theses were.

Related: idiosyncratic-risk, beta, beta-weighted-delta, hedge-ratio

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How a call option's delta changes with the underlying priceAn S-shaped curve rising from zero, passing through about a half at the strike, and flattening near one.Delta of a call option1.000.5008090110120Out of the moneyAt the moneyIn the money1.00 means it moves one-for-one with the stockdelta ≈ 0.50 at the strikeStrike 100Underlying price
Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.

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