Every person should understand that risk has its rewards.  Thus, within the academic and “street” realm there is an urge to exploit risk to the highest degree to reap the greatest benefits.  Today, creation of analytical tools to measure risk has provided some insight on ways to diversify risk exposure, and refine the basic understanding of market risk. When investing into a portfolio of stocks or bonds, the modern portfolio theory recognizes that diversifying cannot eliminate all risk.  Stocks in particular have a tendency to move up and down which suggests that diversification in practice reduces some but not all risk.  The idea behind systematic or more commonly referred to as market risk, is fairly easy to understand.  Many finance specialists such as John Lintner and William Sharpe focused their intellectual strategies in determining what part of a security’s risk can be eliminated by diversification and what part cannot.  This subject matter was so important that William Sharpe in particular received a Nobel Prize for his contribution of work.  The model that systematic or market risk supports is called the capital-asset pricing model.  The basic logic behind the capital-asset pricing model is that there is no premium for bearing risks that can be diversified away.  Thus, to get a high average long-run rate of return in a portfolio, you need to increase the risk level of the portfolio that cannot be diversified away.  According to this theory, savvy investors can outperform the overall market and win the profit race simply by adjusting their portfolios by a risk measure known as beta. Systematic or market risk, captures the reaction of individual stocks (or portfolios) to general market swings.  Some stocks and portfolios tend to be very sensitive to market movements.  Others are more stable.  This relative volatility or sensitivity to market moves can be estimated on the basis of the past record.  This past record or better known as beta; this is the numerical description of systematic risk.  Despite the mathematical manipulations, the basic idea behind this measurement is one of putting some precise numbers on the subjective feelings money managers have had for years. The important thing to realize is that systematic risk cannot be eliminated by diversification.  It is precisely because a large share of stock variability is systematic.  This means that most all stocks move more or less in tandem.  The unsystematic part of the total risk is easily eliminated by adequate diversification.  So, there is no reason to think that investors will receive extra compensation for bearing unsystematic risk.  The only part of total risk that investors will get paid for bearing is systematic risk.  Thus, when reflecting back to Sharpe’s capital-asset pricing model, the returns or risk premiums for any stock or portfolio will be related to beta, but the systematic risk cannot be diversified away. Bibliography A Random Walk Down Wall Street. By: Burton Gordon Malkiel Pg. 220http://books.google.com/books?id=3cioifqOLxkC&pg=PA223&dq=systematic+mar... Systematic risk. The Known Market Risk.http://www.library.fullerton.edu/asp/EZCheck.aspx?URL=http://xerxes.cals... An Empirical Investigation of Systematic Risk in the Market Model.http://www.jstor.org/pss/2352886