Understanding Unsystematic Risk

In an increasingly volatile world, it is important to understand the various types of risk that come along with each investment you make – in the hopes that your understanding will go some way to mitigating the overall risk of losing money.

Unsystematic risk is exclusive to a specific business or industry, it can also be referred to as non-systematic risk, specific risk, residual risk or diversifiable risk.

In reference to an investment portfolio, Unsystematic Risk can be mitigated through diversification.

This is a stark difference when contrasted with systematic risk, which is inherent in the market.

Understanding The Concept

Unsystematic risk can be defined as the as the indecision in a business or the industry investment.

Forms of unsystematic risk can include a new competitor in the market with the potential to claim substantial market share from the company you invested in, or even a regulatory change.

Whilst some investors may be able to predict some sources of unsystematic risk, there is an increasingly low chance of anticipating when or how this might occur.

For instance, an investor in biotechnology stocks may be aware that a breakthrough is within close proximity, however, the investor will not know what the breakthrough is until it happens.

Therefore, the investor in biotechnology will not understand how consumers or the market will act.

Company-Specific Risk

Two fundamental factors contribute to company-specific risk, both of which the investor has no chance of controlling or decreasing.

Business Risk

Both external, as well as internal issues, have the possibility of contributing to a business’s risk.

Internal risk related to the operation efficiency of the business and their ability to act productively throughout the transformation processes.

For example, a company paying far too much for its natural resources would be considered a business risk when investing.

The external business risk that is key to investors is legislation that might affect the bottom line of the company.

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are ...

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