Unsystematic risk

Unsystematic risk is a hazard that is specific to a business or industry. Examples of unsystematic risk are:

  • A change in regulations that impacts one industry
  • The entry of a new competitor into a market
  • A company is forced to recall one of its products
  • A company is found to have prepared fraudulent financial statements
  • A union targets a company for an employee walkout
  • A foreign government expropriates the assets of a specific company

An investor may be aware of some of the risks associated with a specific company or industry, but there are always additional risks that will crop up from time to time.

The presence of unsystematic risk means that the owner of a company's securities is at risk of adverse changes in the value of those securities because of the risk associated with that organization. This type of risk can be reduced by investing in a diversified portfolio of investments. By doing so, the risks associated with each security in the portfolio will tend to cancel each other out. The best way to reduce unsystematic risk is to diversify broadly. For example, an investor could invest in securities originating from a number of different industries, as well as by investing in government securities.

The use of diversification will still subject an investor to systemic risk, which is risks that impact the market as a whole.

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Enterprise Risk Management