Investors need to understand the inherent risks that come with purchasing investments, including systematic and unsystematic risk. Systematic risk can be attributed to macroeconomic forces, such as recessions, interest rates and war. These types of factors will affect all companies in an economy. Unfortunately, diversification of an investor's portfolio will not eliminate systematic risk because the risk is common to all securities of the same class, for example, stocks and bonds.

In contrast, unsystematic risk can be attributed to factors that are unique to the securities of an individual company or a smaller group of companies, such as litigation or a strike. Because unsystematic risk is unique to a company, diversifying an investor's portfolio will help reduce risk, since the investor is holding a more diverse portfolio with securities of other companies and not just one.