Unsystematic Risk
Candlefocus EditorUnsystematic risk involves a number of factors, such as supply and demand of a company’s product, industrial and political changes, legal issues, accounting policies, managerial decisions, and technological change. Unlike systematic risk, which applies uniformly to all broader market investors, unsystematic risk applies to individual stocks or small groups of stocks, and so is more subject to change.
For those investors who pursue a more aggressive risk profile, unsystematic risk can be a beneficial component of their portfolio. For sufficiently diversified portfolios, unsystematic risks may not even be an issue. Unsystematic risks carry with them both opportunities and challenges.
More conservative investors should consider avoiding the element of unsystematic risk entirely by constructing and maintaining diversified portfolios. Investors can diversify their portfolios by selecting investments in different asset classes that are not correlated, such as bonds, equities, and alternative investments. These investments will spread the investment’s exposure to a wider range of stock, sector, and macro-related risks.
In conclusion, unsystematic risk can be effectively mitigated by diversifying a portfolio. By investing in asset classes that are not correlated, and choosing investments from a variety of sectors and industries, investors can maximize their returns while minimizing the risk levels of their portfolios. At the same time, those investors seeking higher returns may appreciate the opportunity to gain additional insight via the increased complexity of their investment portfolios through unsystematic risk.