Unsystematic Risk - Definition, What is Unsystematic Risk, Advantages of Unsystematic Risk, and Latest News - ClearTax (2024)

FAQs

Unsystematic Risk - Definition, What is Unsystematic Risk, Advantages of Unsystematic Risk, and Latest News - ClearTax? ›

Meaning of Unsystematic Risk

Advantages of unsystematic risk

Unsystematic risk only affects a specific company or an industry. The larger economy and the market would remain unaffected by these risks. Since these risks are very specific, they may not be as severe as systematic risks. Furthermore, the impact of unsystematic risk is also much lower.

Unsystematic risk is the risk that is unique to a specific company or industry. It's also known as nonsystematic risk, specific risk, diversifiable risk, or residual risk.

Unsystematic Risk → Unsystematic risk is company-specific (or industry-specific) risk that can be reduced through portfolio diversification. Some common examples of sources that cause unsystematic risk are unexpected supply chain shutdowns, regulatory changes, and industry headwinds from technological innovation.

In one's personal life, taking risks can lead to new experiences, self-discovery , and personal growth. On the other hand , taking risks can also lead to negative consequences such as financial loss, failure, and disappointment. In such cases the human element is what becomes important.

High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns. But if things go badly, you could lose all of the money you invested.

Unsystematic risk is also known as specific risk, meaning the dangers that are unique to a single company or industry. However, these risks do not only occur one firm at a time. For example, a poor manager might pose a specific risk to a single company's stock price.

A warehouse fire is a risk that can be reduced or diversified. This risk can be reduced through appropriate safety measures. Further, the financial loss from the risk can be reduced through insurance coverage. Therefore, it serves as a good example of unsystematic risk.

Definitions of unsystematic. adjective. lacking systematic arrangement or method or organization. “unsystematic and fragmentary records” “he works in an unsystematic manner”

Is unsystematic risk controllable or not? ›

Nature: Systematic risks are unavoidable and uncontrollable, whereas unsystematic risks are avoidable and controllable. Factors: Systematic risks result from external factors that occur at a macroeconomic level, which is why they're unavoidable and uncontrollable.

It is clearly visible in the graph that an unsystematic risk is more in case you do not have a diversified portfolio. But, as you start investing in more than one stocks, your unsystematic risk goes down and approaches zero.

2. Unsystematic risk is controllable by an organization and micro in nature. Systematic risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization's point of view.

The main difference between systematic risk and unsystematic risk is that systematic risk affects the entire market, while unsystematic risk is specific to a particular company or industry. Every investment has some degree of risk. Even when you invest in safe assets, there is a possibility to lose money.

However, the beta calculation can't detect any unsystematic risk. Adding a stock to a portfolio with a beta of 1.0 doesn't add any risk to the portfolio, but it also doesn't increase the likelihood that the portfolio will provide an excess return.

These can include business risk (related to a company's operations, management, or industry competition), financial risk (stemming from capital structure or financial decisions), legal and regulatory risks, technological risks, and even macroeconomic events that impact a particular sector.

Nature: Systematic risks are unavoidable and uncontrollable, whereas unsystematic risks are avoidable and controllable. Factors: Systematic risks result from external factors that occur at a macroeconomic level, which is why they're unavoidable and uncontrollable.

The capital market will only reward investors for bearing risk that cannot be eliminated by diversification. Unsystematic risk can be diversified away, so the capital market will not reward investors for taking this type of firm specific risk.