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.
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 ?
Given the crucial role tanker drivers play and the systematic and unsystematic risks in their operations, it was important that from time to time, TTF Limited creates a forum where already known and emerging risks in the transporting of these inflammable products would be discussed.
Yager's entropy, which can minimize the distance between the weight of assets and equal weight, is used to describe unsystematic risks.
These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
This model separates the shares' risk in two categories: systematic and unsystematic risks (Allan Hill, 2010).
The first two terms are the familiar measures for systematic and unsystematic risks, respectively.
For simplicity, these risk premia are typically grouped together as one aggregated risk premium accounting for both systematic and unsystematic risks. Once an expected rate of return is calculated, it is important for a financial planner to determine if rates of return available in the marketplace are adequate for the level of risk that the client is willing to accept.
2002) are represented by unsystematic risks. E.g., (linear) dependencies between changes of the incomes of different customer segments (caused by a recession and thus a reduced size of wallet) can be represented mostly by correlations between customer segments.
Harrigan (1984) points out some possible causes of such increased unsystematic risks such as higher exit barriers and risk of excess capacity.
However, it is entirely possible that the investment alternative that maximizes the wealth of fictional undiversified shareholders that are assumed to be risk-averse to some particular extent with regard to unsystematic investment risks, and that are unconcerned with the alternative's impacts upon the corporation's preferred shareholders or bondholders, or upon the holders of securities of other corporations, may not be the same investment alternative most favored by fully diversified shareholders who are risk-neutral with regard to those unsystematic risks and who are quite concerned about the consequences of the alternatives for the values of all of these other securities they own.