Unsystematic Risk 2019-01-16 08:00:00

Unsystematic Risk

The risk attributed to the assets of a single industry or company. Commonly referred to as “specific risk”, unsystematic risk is not correlated to the performance of the overall market. Examples of unsystematic risk include new competition, regulatory changes, fraudulent behavior by a company’s senior management, and union strikes.

Contrary to systematic risk, unsystematic risk can be diversified against. By holding a multitude of unrelated assets in an investment portfolio, one can mitigate the downside of single events. For example, imagine a portfolio of equities held airline stocks, tech stocks, and REIT shares. In the event that airline companies executed a strike, airline stock values may fall, but the integrity of the portfolio may not be compromised. If the portfolio only held airline stocks, however, the value of the entire portfolio may collapse.

 

 


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