Nonsystematic risk

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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Yager's entropy, which is used to optimize the proportion of portfolio capital allocation, effectively characterizes the uncertainty of probability distribution and provide an effective tool to depict the nonsystematic risk of assets [26,32].
Of the 37 IPSs reviewed, only four plans mentioned uncompensated risk, nonsystematic risk, or diversifiable risk.
In other words, the objective of the study is to investigate the relationship between nonsystematic risk and smoothed profits (high-quality and low-quality).
The return on an individual housing transaction is positively associated with national returns, but the association is not strong, which indicates a high level of nonsystematic risk in housing transactions.
This does not require that the nonsystematic risk be identical for all companies.
If a market is incomplete and thus investors cannot form a market portfolio to diversify the nonsystematic risk away, firm-specific and industry-level risk may have the influence over return premium and affect asset prices, making the classical capital asset pricing model (CAPM) unable to explain the returns as perfectly as the theory says.
At one level, general and specific market risk are analogous to systematic and nonsystematic risk in a standard asset-pricing framework.