Next video:
Loading the player...

Unsystematic risk is the part of an investment’s risk that is attributable to the investment itself or to the sub-group it belongs to—but not to the entire economic system. This is in contrast to systematic—or more commonly, systemic—risk, which is the risk that affects all the investments in that system. Every investment has some of both types of risk.

For example, a large restaurant chain has the unsystematic risks that its management might make poor decisions, new  industry regulations will impact operations or food prices will escalate, hurting restaurant profits. These risks affect either the chain alone or the restaurant industry primarily.

The chain also has the systemic risk that a recession or some other large economy-wide problem might cause virtually all stocks in the market to decline at once. In the Great Recession of the late 2000s, many stocks lost value because of systemic risk, as problems starting in the financial industry eventually caused nearly all stock prices to tumble.

Investors can greatly minimize unsystematic risk through diversification into other stocks or stock sectors, but systemic risk cannot be eliminated. It can be reduced, however, by diversifying into non-stock investments, such as bonds.

For example, an investor holding restaurant stocks can lessen potential unsystematic risk by also holding energy, healthcare and technology stocks. However, this will not remove the market-wide systemic risk of a recession or other economic downturn.

Other terms for unsystematic risk are non-systematic risk, non-systemic risk, specific risk, diversifiable risk or residual risk.

Related Articles
  1. Investing

    How To Manage Portfolio Risk

    Follow these tips to successfully manage portfolio risk.
  2. Investing

    Explaining Operational Risk

    Operational risk is the risk that a firm will fail or lose money due to failed internal processes.
  3. Managing Wealth

    One Portfolio For Asset Allocation

    If you treat all of your investments as a single portfolio, you will be better able to maximize returns.
  4. Managing Wealth

    Why Companies Need Risk Management

    Implementing risk management strategies can save an entire organization from failure. Is yours up to snuff?
  5. Investing

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  6. Investing

    10 Risks That Every Stock Faces

    As an investor, the best thing you can do is to know the risks before you buy in. Find out about 10 common stock risks you should look out for.
  7. Managing Wealth

    Modern Portfolio Theory: Why It's Still Hip

    Investors still follow an old set of principles that reduce risk and increase returns through diversification.
  8. Financial Advisor

    Impact Investing Funds: What are the Risks?

    Impact investing funds can carry risks unique to this asset class, including political risk, currency risk and exit risk.
  9. Investing

    Systematic Risk

    Systematic risk, also known as volatility, non-diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes ...
  10. Investing

    Diversification: The Right Way to Manage Risk

    Diversifying your portfolio across multiple asset classes will help you minimize investment risk.
Hot Definitions
  1. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  2. Investing

    The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
  3. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  4. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  5. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  6. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
Trading Center