Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
What is Unsystematic Risk (Specific Risk)?
A failed drug trial, a fraud, a plant fire. Because it can be diversified away at near-zero cost, the market does not pay you to hold it - which is the theoretical case against concentrated positions.
Unsystematic Risk (Specific Risk): a worked example
One stock at 40% of a portfolio drops 60% on an accounting scandal; an index holder barely notices.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Beta
How much a security moves relative to the overall market.
Alpha
Return above what the portfolio's risk exposure would predict.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.
Maximum Drawdown
The largest peak-to-trough decline over a period.