Market risk (systematic risk) is the risk that the entire market falls due to broad economic, political, or global events — it cannot be eliminated through diversification.
Market risk affects all investments simultaneously — a global recession, a sharp interest rate hike, or a geopolitical crisis can drag down the entire stock market regardless of which individual stocks you own. It is the risk that remains after all diversification is done. You can eliminate the risk of one company failing (by owning many companies) but you can't eliminate the risk of the entire market falling. Market risk is measured by Beta — a fund's sensitivity to market movements.
If the entire market crashes because of a war, a pandemic, or a financial crisis — every equity investor takes a hit. There's no stock, no sector, and no strategy that fully avoids this. Market risk is the price of participation in equity markets. You accept it in exchange for the long-run equity premium (higher returns over fixed income). The only way to reduce market risk is to reduce equity allocation — which also reduces long-term return potential.
Diversification reduces stock-specific (idiosyncratic) risk but NOT market risk.
Beta measures market risk: beta of 1 = moves 1:1 with market; beta of 1.3 = 30% more volatile than market.
Defensive sectors (FMCG, pharma) tend to have lower beta; cyclical sectors (metals, real estate) have higher beta.