There are two general categories of investment risk.
Systematic risk is the general risk facing all investments. Systematic risk arises out of the economic system and includes examples such as interest rate changes, inflation, or currency risk. Another name for systematic risk is nondiversifiable risk, i.e., it cannot be eliminated or avoided by having a large portfolio of many different assets.
The other major category of risk is nonsystematic risk; this type of risk can be specific to a firm or an industry and is more associated with an industry in general or a specific company's cash flows, management, or product risk. Portfolio diversification is intended to reduce nonsystematic risk through investing in different industries and various companies to reduce the amount of exposure an investor has in any single area.
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