Unsystematic Risk
Company- or industry-specific risk that can be reduced through diversification.
What is Unsystematic Risk?
Unsystematic risk — also called idiosyncratic, specific, or diversifiable risk — is risk arising from factors unique to a specific company or industry, rather than the broad market. Examples include management failures, product recalls, regulatory actions, lawsuits, and competitive disruptions. Because unsystematic risk is uncorrelated across companies, it can be substantially reduced by holding a diversified portfolio of many securities. Modern portfolio theory suggests that investors receive no additional return for bearing unsystematic risk, since it is avoidable — only systematic risk is priced into expected returns.
Example
An investor holding only one pharmaceutical stock faces enormous unsystematic risk from FDA drug approval decisions. Holding 30+ stocks across different sectors largely eliminates this company-specific exposure, leaving mainly systematic market risk.