Unsystematic risk refers to company-specific or industry-specific risk that can affect an investment’s performance independently from the overall market.
Examples of unsystematic risk include a new competitor in the marketplace with the potential to take significant market share from the company in which you’re invested, a regulatory change (which could drive down company sales), a shift in management, or a product recall. Many investors ask what is unsystematic risk, and it can be described as the doubt that is intrinsic in a company or industry investment.
While investors may be able to anticipate some sources of unsystematic risk, it is nearly impossible to be aware of all risks. For instance, an investor in healthcare stocks may be aware that a major shift in health policy is on the horizon, but may not fully know the particulars of the new laws and how companies and consumers will respond.
Other examples of unsystematic risks include strikes and outcomes of legal proceedings. These are common unsystematic risk examples seen across different industries. This risk is also known as a diversifiable risk since it can be eliminated by sufficiently diversifying a portfolio.
Many traders often ask, can unsystematic risk be diversified, and the answer is yes through proper portfolio diversification. There isn’t a formula for calculating unsystematic risk. Instead, it must be extrapolated by subtracting the systematic risk from the total risk.
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Both internal and external issues may cause business risk. Internal risks are tied to operational efficiencies. For example, if a company plans to open a new factory, a construction delay would be an internal risk, as it may result in the loss of competitive advantage. Business risk is one of the major types of unsystematic risk that investors evaluate before investing.
Financial risk relates to the capital structure of a company. A company needs to have an optimal level of debt and equity to continue to grow and meet its financial obligations. A weak capital structure may lead to inconsistent earnings and cash flow that could prevent a company from trading.
When the Federal Reserve raises interest rates, some companies may be stuck with lower-yielding investments. With interest rates moving higher, they would presumably seek to replace existing low-yield debt with newer, higher-yielding debt investments. However, the higher rates lower the resale value of existing debt investments, meaning the holders are stuck either selling for a loss or missing out on higher rates.
Operational risks can result from unforeseen or negligent events, such as a breakdown in the supply chain or a critical error being overlooked in the manufacturing process. A security breach could expose confidential information about customers or other types of key proprietary data to criminals.
Operational risk is tied to operations and the potential for failed systems or policies. These are the risks for day-to-day operations and can result from breakdowns in internal procedures, whether tied to systems or employees. For example, a refinery may experience a leak from one of its holding tanks, shutting down production until the damage can be repaired. Meanwhile, the refinery is offline and not producing the refined products that customers are demanding, leaving the refinery without any income for a period of time.
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Legal and regulatory risk is the risk that a change in laws or regulations will hurt a business. These changes can increase operational costs or introduce legal hurdles.
When the U.S. Food and Drug Administration (FDA) bans a specific drug, that is an example of regulatory risk for the company that produces the drug. Other unsystematic risk examples can include errors in agreements, class-action lawsuits, or legal violations.
More drastic legal or regulatory changes can even stop a business from operating altogether, such as in April 2024, when then-President Joe Biden signed a bill to ban TikTok unless its Chinese owners sold it within one year. As of June 2025, that deadline has been extended to give the company time to find a U.S. buyer.
A strategic risk may occur if a business gets stuck selling goods or services in a dying industry without a solid plan to evolve the company’s offerings. A company may also encounter this risk by entering into a flawed partnership with another firm or competitor that hurts its future prospects.
In the current environment, there is a rush to develop electric cars, for example, opening up a whole new field of competition within the auto industry. Those late to the game are facing significant strategic risk. Read more about forex risk management.
The total risk for investments is unsystematic risk plus systematic risk. Understanding systematic vs unsystematic risk is important for portfolio management. Unsystematic risk is a risk specific to a company or industry, while systematic risk is the risk tied to the broader market—also referred to as market risk.
Systematic risk is attributed to broad market factors and is the investment portfolio risk that is not based on individual investments.
Systematic risks can include interest rate changes, recessions, or inflation. Systematic risk is often calculated with beta, which measures the volatility of a stock or portfolio relative to the entire market. Meanwhile, company risk is a bit more difficult to measure or calculate. Investors frequently ask how is unsystematic risk measured, and it is commonly analyzed using variance and diversification methods.
Systematic and unsystematic risks can be mitigated, in part, with risk management. Systematic risk can be reduced with asset allocation, while unsystematic risk can be limited with diversification. This also answers the common question, ” Can unsystematic risk be eliminated, to a large extent, through diversification.
By owning a variety of company stocks across different industries, as well as by owning other types of securities in a variety of asset classes, investors can reduce the impact of single events.
For example, an investor who owns nothing but airline stocks would face a high level of unsystematic risk (also known as idiosyncratic risk). They would be vulnerable if airline industry employees went on strike, which could temporarily sink airline stock prices. Simply the anticipation of this news could hamper their portfolio.
By adding uncorrelated holdings to their portfolio, such as stocks outside of the transportation industry, the investor would spread out air-travel-specific concerns. Unsystematic risk, in this case, affects not only specific airlines but also other industries that airlines do business with, such as large food companies. In this regard, the investor could diversify away from public equities altogether by adding U.S. Treasury bonds as additional protection from fluctuations in stock prices.
Even a portfolio of well-diversified assets cannot escape all risk, however. The portfolio will still be exposed to systematic risk, which refers to the uncertainty that faces the market as a whole and includes shifts in interest rates, recessions, financial crises, wars, and natural disasters.
Investors try to measure all the risks of an asset to estimate their potential losses. Some risks are common across all assets. If a recession occurs or interest rates go up, every company will be affected. This is called systematic risk.
Unsystematic risk is the risk that is specific to a particular company or industry. Some companies might have bad leadership or face lawsuits, or they might be vulnerable to weather events that affect their supply chains. Investors can limit unsystematic risk by investing in a variety of different businesses and industries. This is why many ask, can unsystematic risk be diversified, because diversification helps reduce company-specific losses. Learn about what are the primary factors that influence risk profiles.
Key unsystematic risk examples include management inefficiency, flawed business models, liquidity issues, regulatory changes, or worker strikes.
Understanding systematic vs unsystematic risk is essential for investors. Systematic risk is not diversifiable (i.e., cannot be avoided), while unsystematic risk can generally be mitigated through diversification. Systematic risk affects the market as a whole and can include purchasing power or interest rate risk.
There are five types of unsystematic risk: business, financial, operational, strategic, and legal/regulatory risk.
In stock investing, how is unsystematic risk measured is a common concern among traders. Unsystematic risk can be measured by the unsystematic variance. That is calculated by subtracting systematic variance from the total variance. Investors also search for how to calculate unsystematic risk when analyzing portfolio performance.
Unsystematic risk is diversifiable, meaning that you can reduce this risk if you buy shares of different companies across various industries. Many investors wonder, can unsystematic risk be eliminated, and while it cannot always be removed entirely, diversification greatly minimizes its impact.
Unsystematic risks are often tied to a specific company or industry and can be avoided by building a well-diversified portfolio.
Systematic risk is a non-diversifiable risk or a measure of overall market risk. These factors are beyond the control of the business or investor, such as economic, political, or social factors. Meanwhile, events that affect a specific company are unsystematic risks, such as a labor strike or the FDA denying a new drug.
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