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.

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 ?
Of the four plans that mentioned uncompensated risk in their IPSs, only one county discussed the reduction of uncompensated or nonsystematic risk in any depth.
GSAs with a single cohort can only pool nonsystematic 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).
Just as in a well diversified portfolio of stocks it is possible to eliminate the unique nonsystematic risk of an individual asset, in the case of a debt portfolio, it was assumed that the possible insolvency of one of several hundred borrowers would not have any material impact on the total value of a specific group of mortgages.
Thus, diversifying the production activities in a region will tend to reduce nonsystematic risk.
Confined to a smaller subset of investment choices, SRFs may carry substantial sector biases, thus increasing nonsystematic risk (Kurtz and DiBartolomeo 1996).
with standard portfolio analysis in which systematic risk and expected profit are negatively correlated but nonsystematic risk cannot be eliminated.
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.
Researchers and investors have found that a major benefit of investing in indices is the diversification effect which reduces dispersion or nonsystematic risk.
This does not require that the nonsystematic risk be identical for all companies.
Another example of nonsystematic risk would be loan-type risks, such as high loan-to-value ratios or investor loans.
Comparability, or lack thereof, is a function of the similarity of the historical returns of the practice and the nonsystematic risk features of the practice -- as compared to the same elements for the sample transactional firms.