What is specific risk?
Specific risk, or unsystematic risk, refers to a risk that affects only one company or a group of companies that represent a sector of the stock market. This is as opposed to market, or systematic risk, which affects the market as a whole along with other asset classes.
Where have you heard about specific risk?
Your investment adviser should have informed you about the benefits of diversification within your portfolio of stocks. Whenever you diversify your holdings away from one company or one sector, you’re mitigating the specific risks associated with those investments. Market risk cannot be mitigated using diversification as it affects your entire portfolio.
What you need to know about specific risk.
As an investor in shares, it’s important to learn the technique of diversifying your portfolio to lessen specific risk to a company or sector. You should look for stocks and sectors whose historical returns haven’t been overly correlated, and ideally, those whose returns may have moved in opposite directions. Some sectors have a high positive correlation to the performance of the wider economy. This specific risk can be mitigated by diversifying into more defensive sectors that are much less dependent on the broader economic outlook. Diversifying between growth and value stocks lessens another type of specific risk.