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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.

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