Diversifiable risk is the possibility that there will be a change in the price of a security because of the specific characteristics of that security. Diversification of an investor’s portfolio can be used to offset and therefore eliminate this type of risk. Diversifiable risk differs from the risk inherent in the marketplace as a whole.
An example of a diversifiable risk is that the issuer of a security will experience a loss of sales due to a product recall, which will result in a decline in its stock price. The entire market will not decline, just the price of that company’s security. An investor could mitigate this risk by also investing in the shares of other companies that are not likely to have product recalls.