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Unsystematic Risk vs Systematic Risk – Definition – Meaning – Example

What Is Unsystematic Risk?

Unsystematic RiskUnsystematic risk is a risk or potential danger that is inherent to a specific company or industry. It can be greatly reduced through portfolio diversification across different industries and classes of assets.

Unsystematic risk is unique to a specific company or industry. It is also referred to as “nonsystematic risk,” “specific risk,” “diversifiable risk” or “residual risk”.  Investors reduce unsystematic risk in an investment portfolio, unsystematic risk through diversification.

Systematic risk, however, is inherent in the market as a whole.  As a result, diversification cannot eliminate market-wide risk.  Once diversified, investors are still subject to market-wide systematic risk.

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