--- title: What Is Unsystematic Risk? description: Portfolio diversification is a risk management strategy that many investors follow. In this article, we’ll go over what unsystematic risk is. image: https://www.realized1031.com/hubfs/what%20is%20unsystematic%20risk%3F-1160817583.jpg --- [![Realized 1031 Exchange Marketplace](https://www.realized1031.com/hs-fs/hubfs/Images/Brand/Logo/Realized/Realized-Logo-Black.png?width=240&height=80&name=Realized-Logo-Black.png "Realized 1031 Logo") ](https://www.realized1031.com/) - [Wealth Management Gap](https://www.realized1031.com/the-wealth-management-gap) - [Our Process](https://www.realized1031.com/how-realized-works) - [Financial Advisors](https://www.realized1031.com/advisor) - [Resources](https://www.realized1031.com/resources) - [The Company](https://www.realized1031.com/about-us) - [Articles](https://www.realized1031.com/blog) [Register](https://www.realized1031.com/marketplace) [Log In](https://www.realized1031.com/login) - Better Business Bureau Rating: **A+** - [FINRA BrokerCheck](https://brokercheck.finra.org/firm/summary/22333) - [Call](tel:1-877-797-1031) **(877) 797-1031** # What Is Unsystematic Risk? Posted Jun 24, 2022 ![what is unsystematic risk?-1160817583](https://www.realized1031.com/hs-fs/hubfs/what%20is%20unsystematic%20risk%3F-1160817583.jpg?width=750&height=392&name=what%20is%20unsystematic%20risk%3F-1160817583.jpg) Portfolio diversification is a risk management strategy that many investors follow. But what risks are investors trying to reduce through diversification? Some risks can’t be reduced, but that isn’t what diversification is after. Diversification helps manage unsystematic risk. In this article, we’ll go over what unsystematic risk is. ### Risk That Can Be Managed Industry, company, or property-specific risk can be managed through diversification. Risk specific to an entity and not the market as a whole is called unsystematic or [idiosyncratic risk](https://www.realized1031.com/blog/what-is-idiosyncratic-risk-how-do-you-calculate-it).  The market as a whole presents a risk, called systematic risk, that investors can’t reduce or eliminate. It comes with the investing territory. This risk is also called non-diversifiable risk. Systematic and unsystematic risks are the two risks that investors are exposed to. These two risks added together equal total investment risk. [Diversification](https://www.realized1031.com/glossary/diversification) is a necessary tool for managing unsystematic risk. By adding more uncorrelated or weakly correlated stocks to a portfolio, an investor reduces the chances that all stock prices in the portfolio will move simultaneously and in the same direction. Diversification says that as some stocks move up, others should move down. The result is a less volatile (i.e., less risky) portfolio. The opposite of diversification would be to take all of one’s capital and invest it in a single stock. In this scenario, the investor has 100% exposure to one stock. The investor’s entire portfolio is in one stock. Whatever happens to that stock also fully happens to the portfolio. In this case, the investor has put all of their eggs into one basket. Diversification spreads an investor’s exposure across many stocks, lessening the impact of any one stock on the portfolio. We mentioned earlier that total risk consists of systematic and unsystematic risks. Through diversification, investors limit unsystematic risk and thus overall risk. ### Examples of Unsystematic Risk What does unsystematic risk look like? If we look at a company (representing a stock in an investor’s portfolio), some unsystematic risks include: - Loss of market share due to competitors - Poor execution of a new strategy - CFO or CEO suddenly leaves the company - New regulations that adversely affect a company’s operations - Loss of a large customer By spending time researching companies, investors may be able to uncover potential idiosyncratic risks. In other words, it can pay to research companies and understand the various types of risk they may be exposed to. The same can’t be said for systematic risk. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Examples shown are hypothetical and for illustrative purposes only. Diversification does not guarantee a profit or protect against a loss in a declining market. 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Risk That Can Be Managed Industry, company, or property-specific risk can be managed through diversification. Risk specific to an entity and not the market as a whole is called unsystematic or idiosyncratic risk. The market as a whole presents a risk, called systematic risk, that investors can’t reduce or eliminate. It comes with the investing territory. This risk is also called non-diversifiable risk. Systematic and unsystematic risks are the two risks that investors are exposed to. These two risks added together equal total investment risk. Diversification is a necessary tool for managing unsystematic risk. By adding more uncorrelated or weakly correlated stocks to a portfolio, an investor reduces the chances that all stock prices in the portfolio will move simultaneously and in the same direction. Diversification says that as some stocks move up, others should move down. The result is a less volatile (i.e., less risky) portfolio. The opposite of diversification would be to take all of one’s capital and invest it in a single stock. In this scenario, the investor has 100% exposure to one stock. The investor’s entire portfolio is in one stock. Whatever happens to that stock also fully happens to the portfolio. In this case, the investor has put all of their eggs into one basket. Diversification spreads an investor’s exposure across many stocks, lessening the impact of any one stock on the portfolio. We mentioned earlier that total risk consists of systematic and unsystematic risks. Through diversification, investors limit unsystematic risk and thus overall risk. Examples of Unsystematic Risk What does unsystematic risk look like? If we look at a company (representing a stock in an investor’s portfolio), some unsystematic risks include: Loss of market share due to competitors Poor execution of a new strategy CFO or CEO suddenly leaves the company New regulations that adversely affect a company’s operations Loss of a large customer By spending time researching companies, investors may be able to uncover potential idiosyncratic risks. In other words, it can pay to research companies and understand the various types of risk they may be exposed to. The same can’t be said for systematic risk. This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. All real estate investments have the potential to lose value during the life of the investment. All financed real estate investments have the potential for foreclosure. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Examples shown are hypothetical and for illustrative purposes only. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.", "articleSection" : [ "Risk" ], "author" : { "@type" : "Person", "email" : "marketing@realized1031.com", "image" : "", "name" : "The Realized Team", "url" : "https://www.realized1031.com/blog/author/the-realized-team" }, "dateModified" : "2022-06-24T12:00:01+0000", "datePublished" : "2022-06-24T12:00:01+0000", "description" : "Portfolio diversification is a risk management strategy that many investors follow. 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