Question

What is meant by unsystematic risk?

Hint:

Diversification across sectors helps reduce unsystematic risk significantly.

Answer 1

Unsystematic risk, also referred to as specific or diversifiable risk, pertains to uncertainties that impact a single entity or economic sector. These risks stem from internal operational failures or industry-specific challenges, irrespective of broader market movements. Factors Contributing to Unsystematic Risk:

Ineffective management or inadequate corporate oversight.
Disruptions from labor actions or supply chain interruptions.
New regulations impacting a particular industry.
Unexpected product defects or legal actions.
In contrast to systematic risk, unsystematic risk can be mitigated or entirely removed through diversification, achieved by investing in a portfolio comprising assets from various industries and sectors.