Nonsystematic risk

(redirected from Idiosyncratic Risks)

Nonsystematic risk

Nonmarket or firm-specific risk factors that can be eliminated by diversification. Also called unique risk or diversifiable risk. Systematic risk refers to risk factors common to the entire economy.

Nonsystematic Risk

Risk that is unique to a certain asset or company. An example of nonsystematic risk is the possibility of poor earnings or a strike amongst a company's employees. One may mitigate nonsystematic risk by buying different of securities in the same industry and/or by buying in different industries. For example, a particular oil company has the diversifiable risk that it may drill little or no oil in a given year. An investor may mitigate this risk by investing in several different oil companies as well as in companies having nothing to do with oil. Nonsystematic risk is also called diversifiable risk. See also: Undiversifiable risk.

Nonsystematic risk.

Nonsystematic risk results from unpredictable factors, such as poor management decisions, successful competitive products, or suddenly obsolete technologies that may affect the securities issued by a particular company or group of similar companies.

Portfolio diversification, which means spreading your investment among a number of asset subclasses and individual issuers within those subclasses, can help counter nonsystematic risk.

References in periodicals archive ?
In the risk-factor frameworks that underpin the internal ratings-based (IRB) risk weights of Basel II, credit risk in a portfolio arises from two sources, systematic and idiosyncratic risks.
Firms may be inclined to withdraw an authority when they face negative systematic and idiosyncratic risks, bringing them close to financial distress.
The Fund invests in equities and equity index derivatives to construct country-level and sector equity exposures while attempting to minimize the structural or idiosyncratic risks of individual securities.
In particular, both the Fed and the PRA require capital projections under supervisory scenarios created by the regulators and internally generated scenarios that are to include bank-specific idiosyncratic risks.
For instance, Hackbarth, Miao, and Morellec (2006) propose a model in which firms' cash flows are conditional on both idiosyncratic risks and macroeconomic conditions.
The report, Bond Investors Keep Calm and Carry Carefully, notes the importance of focusing on areas of the market where valuations are attractive while avoiding idiosyncratic risks.
Cat bonds represent idiosyncratic risks, diversifiable at the world level.
Finally, high finance allows for portfolio diversification, so that individual investors can seek high-expected returns without being forced to assume large, idiosyncratic risks of bankruptcy and poverty.
Finally, high finance allows for portfolio diversification, so that individual investors can seek high expected returns without being forced to assume large, idiosyncratic risks of bankruptcy and poverty.
The work of Easley, Kiefer, and Possen (1993) develops a stylized two-period model where households face uninsurable idiosyncratic risks.
Yet most would agree that these yields do not accurately reflect the idiosyncratic risks that exist within a servicing portfolio.
For example, if investors are subject to large idiosyncratic risks in their labor income and can share these risks only indirectly by trading a few assets such as stocks and Treasury bills, their individual consumption paths may be much more volatile than aggregate consumption.