What is the difference between systemic and unsystematic risk?

Systemic risk refers to the potential for a failure in a whole system or market, typically due to interconnectivity among financial institutions and markets. This type of risk affects the entire market or economy, rather than being confined to individual entities or sectors. Examples include economic downturns, financial crises, or systemic failures that can spread widely and impact a broad range of assets simultaneously.

On the other hand, unsystematic risk is specific to individual assets or companies. This type of risk is often tied to unique factors affecting a particular business or industry, such as management decisions, product recalls, or sector-specific developments. Investors can mitigate unsystematic risk through diversification, by holding a portfolio of various assets, thereby reducing the impact of any single asset's poor performance on the overall investment outcome.

Therefore, the correct choice highlights that systemic risk impacts the entire market while unsystematic risk is specific to particular assets, allowing for a clear distinction between these two fundamental concepts in financial economics.