What Is Unsystematic Risk?

Unsystematic risk is the risk that is unique to a specific company or industry. It's also known as nonsystematic risk, 澳洲幸运5开奖号码历史查询:specific risk, diversifiable risk, or residual risk. In the context of an investment portfolio, unsystematic risk can be reduced through diversification—while systematic risk is the risk that's in🧜herent in the market.

Understanding Unsystematic Risk

Unsystematic risk can be described as the uncertainty inherent in a company or industry investment. 澳洲幸运5开奖号码历史查询:Examples of unsystematic risk include a new competitor in the marketplace with the potential to take significant market share from the company invested in, a regulatory change (which could drive down company sales), a shift in management, or a 澳洲幸运5开奖号码历史查询:product recall.

While investors may be able to anticipate some sources of unsystematic risk, it is nearly impossible to be aware of all risks. For instance, an investor in healthcare stocks may be aware that a major shift in health policy is on the horizon, but 🌳may not fully know the particulars of the new laws and how companies and consumers will respond.

Other examples of unsystematic risks include strikes and outcomes of legal proceedings. This risk is also known as a diversifiable risk since it can be eliminated by sufficiently diversifying a portfolio. There isn't a formula for calculating unsystematic risk. Instead, it must be extrapolated by subtracting the systematic risk from the total risk.

Types of Unsystematic Risk

Business Risk

Both internal and external issues may cause business risk. Internal risks are tied to operational efficiencies. For example, if a company plans to open a new factory, a construction delay would be an internal risk, as it may result in the lಞoss of competitive advantage.

Financial Risk

Financial risk relates to the capita🌱l structure of a company. A company needs to have an optimal level of debt and equity to continue to grow and meet its financial obligations. A weak capital structure may lead to inconsis𝓀tent earnings and cash flow that could prevent a company from trading.

When the 𒁏Fed raises interest rates, some companies may be stuck with lower-yielding investments. With interest rates moving higher, they would presumably seek to replace existing low-yield debt with newer, higher-yielding debt investments. However, the higher rates lower the resa🅷le value of existing debt investments, meaning the holders are stuck either selling for a loss or missing out on higher rates.

Operational Risk

澳洲幸运5开奖号码历史查询:Operational risks can result from unforeseen or negligent events, such as a breakdown in the supply chain or a critical error being overlooked in the manufacturing process. A security breach could expose confidential information about customers or other types o𝐆f key proprietary data to criminals. 

Operational risk is tied to operations and the potential for failed systems or policies. These are the risks for day-to-day operations and can result from breakdowns in internal procedures, whether tied to systems or employees. For example, a refinery may experience a leak from one of its 𒁃holding tanks, shutting down production until the damage can be repaired. Meanwhile, the refinery is offline and not producing the refined products that customers are demanding, leaving the refinery without any income for a period of time.

Strategic Risk

A strategic risk may occur if a business gets stuck selling goods or services in a dying industry without a solid plan to evolve the company's offerings. A company may also encounter this risk by entering into a flawed partnership with another firm or competitor that hurts its future prospects. In the current environment, there is a rush to develop electric cars, for example, opening up a whole new field of competition within the auto industry. Those late to the game are facing significant strategic risk.

Legal and Regulatory Risk 

Legal and 🥀regulato▨ry risk is the risk that a change in laws or regulations will hurt a business. These changes can increase operational costs or introduce legal hurdles.

When the 澳洲幸运5开奖号码历史查询:Food and Drug Administration (FDA) bans a specific drug, that is an example of regulatoᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚry risk for the company that produces the drug. Other types of legal risk can include errors in agreements, class-action lawsuits, or legal violations.

More drastic legal or regulatory changes can even stop a business from operating altogether, such as in April 2024, when President Biden signed a bill to ban TikTok unless its Chinese owners sold it within one year. As o༺f May 2025, that deadline has been exten🔯ded to give the company time to find a U.S. buyer.

Unsystematic Risk vs. Systematic Risk

The total risk for investments is unsystematic risk plus systematic risk. Unsystematic risk is a risk specific to a company or industry, while systematic risk is the risk tied to the broader market—also 澳洲幸运5开奖号码历史查询:referred to as market risk. Systematic risk is attributed to b𝄹road market factors and is the investment portfolio risk that is not based on individual investments. 

Systematic risks can include interest rate changes, recessions, or inflation. Systematic risk is often calculated with beta, which measures the volatility of a stock or portfolio rela🦹tive to the entire market. Meanwhile, company risk is a bit m☂ore difficult to measure or calculate.

Example of Unsystematic Risk

By owning a variety of company stocks across different industries, as well as by owning other types of securities in a variety o𒐪f asset classes, investors 🅘can reduce the impact of any single events.

For example, an investor who owns nothing but airline stocks, would face a high level of unsystematic risk (also known as 澳洲幸运5开奖号码历史查询:idiosyncratic risk). They would𓂃 be vulnerable if airline industry employees went on strike, which could temporarily sink airline stock prices. Simply the anticipation of this news could hamper their portfolio.

By adding 澳洲幸运5开奖号码历史查询:uncorrelated holdings to their portfolio, such as stocks outside of the transportation industry, the investor would spread out air-travel-specific concerns. Unsystematic risk, in this case, affects not only specific a൲irlines but also other industries that airlines do business with, such as large food companies. In this regard, the investor could diversify away from public equities altogether by adding U.S. Treasury bonds as additional protection from fluctuations in stock prices.

Even a portfolio of well-diversified assets cannot escape all risk, however. The portfolio will still be exposed to 澳洲幸运5开奖号码历史查询:systematic risk, which refers to the uncertainty that faces the market as a whole and includes shifts in interest rates, recessions, financial crises, wars, and natural disasters.

Explain Like I'm Five

Investors try to measure all the risks of an asset to estimate their potential losses. Some risks are common across all assets. If a recession occurs or interest rates go up, every company w�🐓�ill be affected. This is called systematic risk.

Unsystematic risk is the risk that is specific to a particular company or industry. Some companies might have bad leadership or face lawsuits, or they might be vulnerable to weather events that affect their supply chains. Investors can limit unsystematic risk by investing in a variety of different businesses and industries.

The Bottom Line

Unsystematic risk is diversifiable, meaning that you can reduce this risk if you buy shares of different companies across ဣvarious industries. Unsystem🦄atic risks are often tied to a specific company or industry and can be avoided by building a well-diversified portfolio. 

Systematic risk is a non-diversifiable risk or a measure of overall market ri🎐sk. These factors are beyond the control of the business or investor, such as economic, political, or social factors. Meanwhile, events that affect a specific company are unsystematic risks, such as a labor strike or the FDA denying a new drug.