Unsystematic Risk

Unsystematic risk, also known as diversifiable risk or idiosyncratic risk, is the risk that is specific to a particular company or asset. It is the risk that is not correlated with the overall market and can be diversified away by holding a well-diversified portfolio.

Unsystematic risk is the opposite of systematic risk, which is the risk that is common to all assets and cannot be diversified away. Systematic risk is caused by macroeconomic factors such as inflation, interest rates, and economic growth.

The amount of unsystematic risk in a portfolio can be reduced by holding a well-diversified portfolio. A well-diversified portfolio is a portfolio that contains a variety of assets that are not correlated with each other. This means that the returns of the assets in the portfolio are not likely to move in the same direction at the same time.

The following are some examples of unsystematic risk:

• The risk that a company's stock price will decline because of a product recall.
• The risk that a company's stock price will decline because of a change in management.
• The risk that a company's stock price will decline because of a natural disaster.

Unsystematic risk is important to consider when making investment decisions. Investors should try to minimize their exposure to unsystematic risk by holding a well-diversified portfolio.