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Risk specific to a single company or industry that can be reduced through diversification. Also called company-specific or idiosyncratic risk.
Why It Matters
Unsystematic risk is the risk you can eliminate by diversifying. If you own only Tesla stock and Tesla has a product recall, your portfolio gets crushed. But if Tesla is 2% of a 50-stock portfolio, the impact is minimal. This is why diversification is called "the only free lunch in investing" — you reduce risk without reducing expected returns.
Key Points
- Examples: CEO scandal, product failure, lawsuit, factory fire — events affecting one company or sector
- Systematic risk (market-wide recessions, interest rate changes) cannot be diversified away
- Studies show 20-30 stocks across different sectors eliminates most unsystematic risk
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Understanding Risk
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Common Questions
Risk specific to a single company or industry that can be reduced through diversification. Also called company-specific or idiosyncratic risk. Unsystematic risk is the risk you can eliminate by diversifying. If you own only Tesla stock and Tesla has a product recall, your portfolio gets crushed.
Unsystematic risk is the risk you can eliminate by diversifying. If you own only Tesla stock and Tesla has a product recall, your portfolio gets crushed. But if Tesla is 2% of a 50-stock portfolio, the impact is minimal. This is why diversification is called "the only free lunch in investing" — you reduce risk without reducing expected returns.
Examples: CEO scandal, product failure, lawsuit, factory fire — events affecting one company or sector
Systematic risk (market-wide recessions, interest rate changes) cannot be diversified away
Studies show 20-30 stocks across different sectors eliminates most unsystematic risk