Unsystematic Risk

Reviewed by Bhavana | Updated on Sep 30, 2020

Meaning of Unsystematic Risk

Unsystematic risk is unique to a given business or industry. It is also known as specific risk, nonsystematic risk, residual risk, or diversifiable risk.

Unsystematic risk is caused due to internal factors; it can be avoided and controlled. Unsystematic risk can be minimised by diversification in the sense of an investment portfolio.

Understanding Unsystematic Risk In Detail

Unsystematic risk can be defined as the inherent uncertainty of an investment in a firm or industry. Types of unsystematic risk comprise a new market competitor with the ability to take substantial market share from the company being invested in, a regulatory change (which could bring down business sales), a management shift, and/or a product recall.

Examples include events, such as legal procedural consequences, strikes, or natural disasters. This risk is also called a diversifiable risk, as it can be removed by proper diversification of a portfolio. There is no formula for estimating unsystematic risk. Instead, it needs to be extrapolated by excluding the systemic risk from the overall risk.

Types of Unsystematic Risks

Unsystematic risks are further divided into two types: 1. Financial Risks 2. Business Risks

Unsystematic Risk Example

Unsystematic risks are often related to entrepreneurial judgment mistakes. A technology company, for example, may conduct market research and anticipate the demand for smaller mobile phones and digital watches to grow in the coming year. Concerning that, manufacturing lines are modified, and money is devoted to smaller products.

Nevertheless, over the next year, the company realises that consumers are more inclined towards bigger phones and watches. Thus, the inventory and machinery the company obtained will later sell or remain unsold at a major loss. This will, in turn, have an impact on the firm's stock prices. Hence, due to poor entrepreneurial foresight, all other firms in the technology sector could perform well, while this company will backtrack.

Related Terms

  • Market Depth

    Market complexity is the ability of the market to maintain relatively large market orders, without affecting the security price.   Read more


  • Clearing Corporation of India Limited (CCIL)

    The Clearing Corporation of India Ltd was established in April 2001 to render guaranteed clearing and settlement functions concerning transactions in G-Secs, money, derivative markets, and foreign exchange.   Read more


  • Beneficial Owner

    A beneficial owner is an individual who gets to enjoy ownership benefits even though the title to some form of the property is in the name of another individual.   Read more


  • Relative Strength

    Relative strength is a calculation of the price trend of a stock or a financial instrument in comparison to another instrument, stock, or industry.   Read more


  • Ulcer Index (UI)

    The Ulcer Index (UI) is an indicator that calculates downside risk in terms of price declines both in magnitude and length.   Read more


  • Prop Shop

    A prop-shop is a trading company that deploys its own resources to generate profits from trading.   Read more


Recent Terms