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Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.

An investment’s market price can change for many reasons.  Changes in the inflation rate, interest rate, economic growth rate, and government tax and trade policy are all circumstances that affect a security’s market price.  And all of those create some sort of risk -- economic, inflation, political, etc.

But those types of risks affect every security the same way, and are referred to as systematic risk. It’s the risk an investor assumes when investing in particular types of investments such as stocks or bonds. If interest rates go, up ALL bond prices go down.

Idiosyncratic risk is inherent in a specific investment such as one particular bond or stock. It’s the risk that can be controlled by the company that issued the security.  For instance, a company’s management may borrow too much money, make bad decisions regarding product pricing or mishandle a public relations crisis.  Any of these examples of idiosyncratic risk could lead to a drop in the company’s stock or bond price.

Unlike systematic risk, idiosyncratic risk can be managed through diversification.  Investors can buy securities that are inversely correlated to one another so that when one security goes down in price, another security goes up in price, and so the two market price changes offset one another.

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