What is Unsystematic Risk?
Unsystematic risk is a hazard that is specific to a business or industry. The presence of unsystematic risk means that the owner of a company's securities is at risk of adverse changes in the value of those securities because of the risk associated with that organization. An investor may be aware of some of the risks associated with a specific company or industry, but there are always additional risks that will crop up from time to time.
How to Reduce Unsystematic Risk
This risk can be reduced by diversifying your investments across multiple industries. By doing so, the risks associated with each security in the portfolio will tend to cancel each other out. The best way to reduce unsystematic risk is to diversify broadly. For example, an investor could invest in securities originating from a number of different industries, as well as by investing in government securities. The use of diversification will still subject an investor to systemic risk, which is risks that impact the market as a whole.
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Examples of Unsystematic Risk
Examples of unsystematic risk are as follows:
A change in regulations that impacts one industry
The entry of a new competitor into a market
A company is forced to recall one of its products
A company is found to have prepared fraudulent financial statements
A union targets a company for an employee walkout
A foreign government expropriates the assets of a specific company
