Systematic risk is the risk caused by economic factors that are beyond the control of business owners. Systematic risks are generally unforeseeable and include increases in interest rates, the level of employment in the industry, new competition, adverse state and/or federal legislation, major weather events, earthquakes, recessions, pandemics, and wars. All of these risks can impact businesses to some degree.

Unsystematic risks are those risks that are within the control of each company. These include the quality of management and employee relations.

The total risk to a business includes both systematic and unsystematic risks. Some of these risks can be reduced by diversification, excellent management skills, and by obtaining comprehensive insurance coverage.

Systemic Risks

A systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy. Systemic risk was a major contributor to the financial crisis of 2008. Companies considered to be a systemic risk are called "too big to fail." These institutions are large relative to their respective industries or make up a significant part of the overall economy. A company highly interconnected with others is also a source of systemic risk. Systemic risk should not be confused with systematic risk; systematic risk relates to the entire financial system.

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