Unsystematic Risk is the risk specific to a particular company, industry, or asset that can be reduced or eliminated through diversification.
Unsystematic Risk, also known as specific risk or diversifiable risk, arises from internal factors affecting a particular company or industry. Unlike market-wide risks, this type of risk is not related to the overall economy and can be minimized by investing in a diversified portfolio.
Common causes of unsystematic risk include:
For example, if one company performs poorly, other investments in a diversified portfolio may perform well, reducing the overall impact. This is why diversification—investing across multiple sectors and assets—is a key strategy to manage unsystematic risk.
Investors focus on reducing unsystematic risk while managing systematic risk (market risk), which cannot be eliminated through diversification.
"If an investor holds shares of only one company and that company faces a scandal, the investment value may fall sharply. However, if the investor holds shares of multiple companies across industries, the impact is reduced—this is how unsystematic risk is managed."