Unsystematic Risk

Dictionary Says

Definition of 'Unsystematic Risk'


Company- or industry-specific hazard that is inherent in each investment. Unsystematic risk, also known as “nonsystematic risk,” "specific risk," "diversifiable risk" or "residual risk," can be reduced through diversification. By owning stocks in different companies and in different industries, as well as by owning other types of securities such as Treasuries and municipal securities, investors will be less affected by an event or decision that has a strong impact on one company, industry or investment type. Examples of unsystematic risk include a new competitor, a regulatory change, a management change and a product recall.

Investopedia Says

Investopedia explains 'Unsystematic Risk'


For example, the risk that airline industry employees will go on strike, and airline stock prices will suffer as a result, is considered to be unsystematic risk. This risk primarily affects the airline industry, airline companies and the companies with whom the airlines do business. It does not affect the entire market system, so it is an “unsystematic” or “nonsystematic” risk.

An investor who owned nothing but airline stocks would face a high level of unsystematic risk. By diversifying his or her portfolio with unrelated holdings, such as health-care stocks and retail stocks, the investor would face less unsystematic risk. However, even a portfolio of well-diversified assets cannot escape all risk. It will still be exposed to systematic risk, which is the uncertainty that faces the market as a whole. Even staying out of the market completely will not take an investor’s risk down to zero, because he or she would still face risks such as losing money from inflation and not having enough assets to retire.

Investors may be aware of some potential sources of unsystematic risk, but it is impossible to be aware of all of them or to know whether or when they might occur. An investor in health-care stocks may be aware that a major shift in government regulations could affect the profitability of the companies they are invested in, but they cannot know when new regulations will go into effect, how the regulations might change over time or how companies will respond.

comments powered by Disqus
Hot Definitions
  1. Closed-End Fund

    A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
  2. Payday Loan

    A type of short-term borrowing where an individual borrows a small amount at a very high rate of interest. The borrower typically writes a post-dated personal check in the amount they wish to borrow plus a fee in exchange for cash.
  3. Securitization

    The process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors.
  4. Economic Forecasting

    The process of attempting to predict the future condition of the economy. This involves the use of statistical models utilizing variables sometimes called indicators.
  5. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
  6. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
Trading Center