Ace the CMA 2025 Challenge – Unlock Your Accounting Superpowers!

The correct answer identifies that systematic risk affects the entire market, which is a fundamental concept in finance and investment theory. Systematic risk, also known as market risk, arises due to factors that impact the entire economy or a significant portion of the market such as changes in interest rates, inflation, or geopolitical events. This type of risk cannot be mitigated through diversification, meaning that when investors spread their investments across various sectors or assets, they cannot entirely protect themselves from systemic events that influence the overall market.

In contrast, the other descriptors do not accurately reflect the characteristics of systematic risk. The notion that it can be eliminated through diversification is incorrect; this applies to unsystematic risk, which is unique to individual securities and can be managed through a varied investment portfolio. The idea that systematic risk is unique to individual securities is also misleading, as it is instead applicable to a broad array of assets across the market. Lastly, the notion that it only impacts small companies is inaccurate because systematic risk impacts all firms regardless of size.

By understanding that systematic risk is linked to market-wide events and influences all participants in the economy, one can better navigate investment strategies and risk management techniques.