Which of the following defines "systematic risk"?

Systematic risk refers to the risk inherent to the entire market or a significant segment of it, which cannot be eliminated through diversification. This type of risk affects all companies and securities in the market and is often linked to macroeconomic factors such as changes in interest rates, inflation, political instability, or natural disasters. Since systematic risk impacts the overall market, it is also known as market risk.

Understanding systematic risk is crucial because while investors can diversify their portfolios to mitigate unsystematic risk (the risk unique to individual companies), they cannot completely avoid systematic risk. As a result, the proper assessment and management of this risk are key components of financial analysis and investment decision-making.

In contrast, risks such as those related to specific companies or credit defaults are examples of unsystematic risk, which can be reduced through diversification. Insufficient liquidity also pertains to individual company circumstances rather than the market as a whole. Therefore, recognizing the unique nature of systematic risk as affecting the broader market is what makes option B the correct definition.