Systematic risk is risk that cannot be avoided and is inherent in the overall market. It is non-diversifiable because it includes risk factors that are innate within the market and affect the market as a whole.
Nonsystematic risk is risk that is local or limited to a particular asset or industry that need not affect assets outside of that asset class.
The sum of systematic variance and nonsystematic variance equals the total variance of the security or portfolio:
Total variance = Systematic variance + Nonsystematic variance
Pricing of Risk
Pricing or valuing an asset is equivalent to estimating its expected rate of return. If an asset has a known terminal value, such as the face value of a bond, then a lower current price implies a higher future return and a higher current price implies a lower future return.
