Unsystematic Risk
Risk specific to a single company or sector that can be reduced by holding a diversified portfolio.
How it is identified
Test: the risk arises from factors particular to one issuer or industry rather than from market-wide conditions
Unit
qualitative
In depth
Also called specific or idiosyncratic risk, this is the risk of a fraud, a failed product, a plant fire, a regulatory action against one company. Because it can be removed at essentially no cost by holding more names, theory says investors are not compensated for bearing it — taking it is uncompensated risk. Most of the benefit arrives quickly: research consistently finds that 20 to 30 reasonably uncorrelated stocks remove the large majority of it, with diminishing returns beyond. This is the argument against concentrated portfolios that is independent of any view about the individual companies.
Worked example
A single stock falls 70% on an accounting scandal. At 2% of a portfolio the damage is 1.4%; at 25% it is 17.5%. The event was identical; only the position size decided whether it mattered.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Unsystematic Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.