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Investopedia explains 'Idiosyncratic Risk'
Since idiosyncratic risk is by definition generally unpredictable, investors should seek to minimize its negative impact on a portfolio by diversification or hedging.
For example, the risk of a pipeline company incurring massive damages because of an oil spill can be mitigated by investing in a broad cross-section of stocks within the portfolio.
As another example, consider a mining exploration company that is operating in a nation where the risk of nationalization is fairly high. This risk can be diversified either by investing in other mining companies that do not operate in the same nation, or can be hedged through the use of options or other hedging instruments.
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