What is the main difference between systematic risk and unsystematic risk?

The main difference highlighted in the correct response is that systematic risk influences the entire market or economy, while unsystematic risk is unique to a specific company or industry. Systematic risk, often referred to as market risk, includes factors such as economic recessions, interest rate changes, or geopolitical events that affect all companies within the market. This type of risk is inherent to the overall market environment and cannot be mitigated through diversification because it impacts virtually all securities to some extent.

On the other hand, unsystematic risk, also known as specific risk, is related to individual assets. For example, factors such as a company's management decisions, product recalls, or changes in specific industries would fall under unsystematic risk. Investors can reduce unsystematic risk through diversification, holding a mix of assets that are not perfectly correlated with one another.

Understanding this distinction is crucial for investors as it informs their risk management strategies. The right approach to portfolio construction can help mitigate unsystematic risks while acknowledging that systematic risks will always be present within the investment landscape, regardless of the specific assets held.