What is the unsystematic risk?
Nesystematic risk is the concept in the theory of finance and portfolio, which refers to the extent to which the company's return is not correlated with the return of the total stock market. This type of risk can be considered a risk specific to a given sector or a society -specific risk. It is the opposite of systematic risk, which is a risk that is its own market. For example, the risk of food poisoning is an unsystematic risk because it only applies to companies that manipulate human food. The risk of a key person is also unsystematic, because few individual societies are likely to suffer a great decrease in value if their leaders should suffer from unexpected inability.
The unsystematic risk of own individual events is commonly quantified by professional investors using statistical regression analysis. Like all forms of risk, it is measured as the volatis of the investor's aspect is negative. However, some risk is less negative than others and reduces less fromasset values. The unsystematic risk is more advantageous than a systematic risk, as its negative effect can be removed in the context of the total portfolio. As a result, a non -systematic risk is also known as a diversifiable risk.
The concept of unsystematic and systematic risk is very useful for investors trying to build a large, diversified investment portfolio that reflects the overall market. If it is well built, this portfolio will monitor the market carefully. If the market increases the value, the portfolio will also increase the value by the same percentage. If the overall market decreases the value, the portfolio will also drop.
The adding of the warehouse That is uncorrelated with the overall market to the portfolio will tend to reduce the volatility of the return of this portfolio. To this extent, the portfolio is reported to become more efficient. The unsystematic risk of individual shares is removed by diversification by its own totalthe portfolio.
The investment market does not change investors for the transmission of non -systematic risk - it does not allow investors to compensate for the specific risk of individual shares. Competition on the investment market reduces shares price to a level that eliminates any compensation for this risk. Effective investors neutralize the negative impact of unsystematic risk through effective portfolio diversification.