total risk is composed of systematic risk and unsystematic risk systematic risk refers to the risks that will affect all firms and that's why we call it market risk why because it will affect the entire market if you study macroeconomics so all macroeconomics indicators are considered an example of systematic risk which means exchange rate interest rate inflation rate unemployment rate is the stage of the business cycle all this affects all firms and that's why all these are considered examples of systematic risk while unsystematic risk it affects a certain firm or a certain sector but it doesn't affect all firms and that's why we call it firm risk an example of this one let's assume that the government decided to analyze polluting industries by paying higher taxes so this will affect only polluting industries but it will not affect all companies therefore which type could be avoidable unsystematic risk could be avoided that's why we call it avoidable risk how while systematic risk is unavoidable and that's why we call it unavoidable risk so how we gonna avoid unsystematic risk through diversification which means don't put all your eggs on the same basket this means every time you invest you need to invest in different sectors and within each sector you need to invest in different companies that's why unsystematic risk is also called diverse fiber risk while systematic risk is called non-diversifiable another synonymous for unsystematic risk is called idiosyncratic risk therefore we know that we could avoid unsystematic risk if we have a well-diversified portfolio which means if we invest in different sectors and within each sector we invest in different companies therefore we'll end up with systematic risk so how do we measure systematic risk systematic risk is measured through beta so what do you mean by beta beta is a measure of systematic risk then we have total risk which is measured through volatility or a standard deviation remember that standard deviation is a statistical terminology while volatility is a finance terminology but both of them are exactly the same so volatility is the same as the standard deviation and both of them has a symbol of sigma so let's draw it on our x-axis we have number of securities our y-axis we have our volatility therefore the bottom part is our systematic risk which is the risks that couldn't be avoided then the more we invest in securities and we have an empirical study around 30 securities and these securities are not strongly correlated they're weakly or negatively correlated we'll discover that our unsystematic risk decreases the more we add more securities to our portfolio and that's why we could avoid unsystematic risk but we cannot avoid systematic risk