Nonsystematic risk

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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 ?
The most important point in the present study is to investigate the kind of relationship between smooth profits and non-systematic risk. This study not only emphasizes smoothing and its effect on investors' behavior but also considers the profit quality.
Is there a significant relationship between non-systematic risk and smoothed profit?
They therefore conclude that this element can potentially thwart efforts to reduce non-systematic risk via diversification.
On the basis of a panel data for eight SEE countries and 10 leading risk indicators over the period 1995-2007, we find that the non-systematic risk is much more important than systematic risk.
Non-systematic risk level varies from -0.005 to 0.0007 and it is about zero.
Second, entrepreneurial individuals and firms may consciously choose to seek out states or regions with above average non-systematic risk. Because individuals can effectively choose to live and work in only one state, knowledge of region-specific characteristics that make higher than risk-adjusted average personal income growth rates possible may influence the selection of one region over another.
A state, for example, may be selected as a location because of its tendency to grow at above systematic risk-adjusted rates due to non-systematic risk characteristics.
This might seem counter-intuitive to Modern Portfolio Theory (MPT) which tells us that the only free lunch in investing is the reduction of non-systematic risk by adequate diversification within a market.
These results indicated higher level of non-systematic risk in bank funds than non-bank ones during 2003 to 2004.
Results of the paired sample analysis indicate that the difference in risk between the two groups of mergers is due to the difference in their non-systematic risk.
Large non-systematic risk found in the return of paintings also suggested that collectors should diversify to other assets.
The activities of art speculators also exaggerate the return volatility of paintings and a large non-systematic risk suggests collectors should diversify their wealth to other assets.

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