Definition
Unsystematic risk includes company-specific events (earnings miss, management scandal, product recall) and industry-specific factors. Unlike systematic risk, it can be virtually eliminated by holding a well-diversified portfolio of 25-30 stocks. CAPM states that unsystematic risk is not compensated—investors bearing it are taking risk without extra return.
lightbulb Example
A pharmaceutical company loses 40% after a drug trial failure—this is unsystematic risk. An investor holding only this stock bears the full loss. A diversified portfolio of 30 healthcare stocks barely notices the impact.
verified_user Key Points
- Company or industry-specific risk
- Eliminated through diversification (25-30 stocks)
- Not compensated with higher expected returns (per CAPM)
- Examples: earnings miss, lawsuit, product failure