Unsystematic Risk
What is unsystematic risk?
Unsystematic risk is the risk that is inherent in a specific company or industry. By investing in a range of companies and industries, unsystematic risk can be drastically reduced through diversification. Synoyms include diversifiable risk, non-systematic risk, residual risk and specific risk.
Where have you heard about unsystematic risk?
You may have heard of unsystematic risk, as opposed to systematic risk, which is the danger that a whole market or financial system may collapse. Such references may have been made by your financial adviser in relation to the need to diversify your investments.
What you need to know about unsystematic risk...
Unsystematic risk is something that affects a single company or even an entire industry, but is not present in other industries. Take, for example, the risk that transport operatives go on strike. If someone holds only stock from the transport industry, they would face high unsystematic risk. To prevent this, it is commonly advised to diversify by investing in a range of industries or sectors.
Thus unsystematic risk can be reduced, but systematic risk will always be present.
