Systematic Risk

• Systematic risk is risk that applies to an entire market, not just a single investment. Good examples include interest rate changes, economic downturns and political changes; basically, anything that affects everyone is systematic risk.
  
  

Hedging

• Systematic risks can only be mitigated through hedging. An example of hedging is futures contracts; if you own beef that sells for $5 a pound in January, you can sign a futures contract with someone to sell it for $6 a pound in June. This means that even if the value of beef falls to $4, you can still sell for $6.
  
  

Unsystematic Risk

• Unsystematic risk is risk that only applies to one certain investment. For example, if you own a house that you rent out to tenants, an unsystematic risk would be the house burning down or the tenants leaving before the lease has run out.
  
  

Diversification

• The only way to manage unsystematic risk is through diversification. This means that you need to spread your investments out; rather than own 100 percent of one house, you could own 20 percent shares in each of five houses. This means that you don't lose your whole investment in the event of an accident or bad tenants.