Unsystematic Risk
Company- or sector-specific risk that can be reduced through diversification across uncorrelated assets.
Unsystematic risk (idiosyncratic or specific risk) arises from factors unique to a single company or sector: an earnings miss, a CEO scandal, supply-chain disruption, or a regulatory fine. Unlike systematic risk, it can be largely eliminated by holding a diversified portfolio of uncorrelated assets.
The more concentrated a portfolio, the greater its exposure to unsystematic risk. A single-stock trader has maximum unsystematic risk; a broad-market index fund has near zero.
Related Terms
Beta
A measure of a stock's volatility relative to the market. Beta > 1 means it moves more than the index; Beta < 1 means it moves less.
IntermediateCorrelation
A measure of how closely two assets move together, ranging from −1 (perfectly opposite) to +1 (perfectly in sync).
IntermediateHedging
Opening an offsetting position to reduce the net risk of an existing trade or portfolio against adverse price movements.
IntermediatePortfolio Heat
The total percentage of account capital currently at risk across all open positions simultaneously.
IntermediateSystematic Risk
Risk that affects the entire market or a broad asset class and cannot be eliminated through diversification.
Intermediate