Which risk reflects the sensitivity of an asset to market-wide volatility that cannot be diversified away?

Systematic risk is the correct choice as it pertains to the inherent risk that affects the entire market or a significant portion of it. This type of risk is associated with macroeconomic factors such as interest rates, inflation, political instability, and changes in economic policy. Because systematic risk affects all investments across the board, it cannot be mitigated through diversification; this means that regardless of how a portfolio is structured, the exposure to market fluctuations remains.

In contrast, unsystematic risk refers to risks that are specific to a particular company or industry and can typically be reduced or eliminated through diversification. Volatility, while related to risk and commonly discussed in investment contexts, is more about the degree of variation in trading prices rather than a specific type of risk. Idiosyncratic risk is similar to unsystematic risk in that it is unique to an individual asset, hence it also can be diversified away.

Understanding systematic risk is crucial for investors because it directly impacts their portfolio’s performance in relation to market movements, highlighting the importance of asset allocation in portfolio management.