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 ?
While some idiosyncratic risks remain, three data points underscore the change on the ground:
Fitch deems this level provides enough protection against idiosyncratic risks.
Investors will increasingly need to differentiate between countries based on idiosyncratic risks, as per the report.
If the idiosyncratic risks associated with CSI are diminished by SPF, this (CSI + SPF) could be an attractive and prudent investment strategy for those investment funds investors wish to allocate to achieve aspirational wealth.
On the downside would be an unexpected additional drop in commodities prices or materialisation of idiosyncratic risks such as political risks or lack of economic reforms.
Looking at insurance bidders, they exhibit increases in total and idiosyncratic risks and a decrease in systematic risk in the pre-2007 period, whereas all their risk components are reduced in the post-2007 deals.
The reason is the inefficiency of financial markets or/and a lack of social insurance program that prevents people from managing idiosyncratic risks in developing countries (Jha and Dang, 2010).
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.
Accordingly, Fitch views community banks as more susceptible to idiosyncratic risks such as geographic and single-name concentrations.
For instance, Hackbarth, Miao, and Morellec (2006) propose a model in which firms' cash flows are conditional on both idiosyncratic risks and macroeconomic conditions.
Supply chain risk management activities in general should be focused on reducing those risks that have the greatest impact on the firm's competitive position, which generally dictates focusing on event risk and idiosyncratic risks rather than systemic supply chain risks.