The CAPM disregards unsystematic risk
, because the model assumes that investors hold highly diversified portfolios, which enable investors to eliminate unsystematic risk
(see Wagner & Lau, 1971; Klemosky & Martin, 1975).
Financial approaches for managing the total or unsystematic risk
component include product and personal liability insurance, lowering the firm's debt-equity ratio, and hedging currency risk with futures contracts.
Specifically, the study decomposes volatility into systematic and unsystematic risk
components and investigates the inherent changes in the underlying stocks' volatility subsequent to the resumption of SSFs.
Unsystematic Risk Unsystematic risk
is that portion of complete risk, which is unique to a company (industry); frequently referred to as residual or specific risk, it relates to particular economic aspects, which influence individual industries, firms, securities and projects, for instance the quality of management or equipment failure.
In order to risk measurement, they applied five criteria of the difference of the sales proposed price, bankruptcy risk, systematic risk, unsystematic risk
and the sum of risk.
is one that arises from specific nature of company, including structure of main investors' investment product type etc.
Further, because concurrent risk adjustment explains more of the variation in current (acute) costs, it reduces unsystematic risk
, which may benefit small health plans that do not have enough enrollees to diversify away unsystematic risk
Lord (1996) investigated a complete theoretical model relating the operating characteristics of a firm to the total, systematic, and unsystematic risk
of its equity.
In general, mortality risk can be divided into different subcategories, among them unsystematic risk
, adverse selection, and systematic risk.
There are no reasons why an investor should receive a better or worse return from investing into an Islamic fund which is a function of systematic risk, unsystematic risk
and capability of the fund manager," he said.
On the other hand, unsystematic risk
involves any event that affects a specific investment.
Theory of CAPM suggests that firm-specific risk is irrelevant because the negative covariance between assets' returns cancel out unsystematic risk
of the assets when sufficiently large numbers of assets are included in a portfolio.