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 ?
To investigate the influence of unsystematic risk on the returns of securities, we have segregated the total risk into two parts systematic and nonsystematic risks and check the significance of both factors independently.
Several studies found that some nonsystematic risks also have effects on timberland investment returns.
H2: There is a significant relationship between low quality smoothed profits and the company's nonsystematic risks.
In other words, the objective of the study is to investigate the relationship between nonsystematic risk and smoothed profits (high-quality and low-quality).
According to Portfolio theory, nonsystematic risk can be reduced by diversification of the stock portfolio.
The main point in the present study is to find out the kind of relationship between profit smoothing and the quality of reported revenues along with nonsystematic risk.
However, because we assume that all idiosyncratic or nonsystematic risks can be diversified away, no other information beyond the counterparties' country, industry, and rating (for example, the counterparties' segmentation criteria) is useful in determining their joint default correlation.
Nonsystematic risks, by contrast, are specific to individual assets and can be reduced by diversification, or they can be eliminated surgically, one loan at a time.