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Risks & Diversification — Unsystematic Investment Risk
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Unsystematic Investment Risk

Unsystematic Investment Risk

Unsystematic risk affects a number of assets rather than the entire market.

Also known as specific risk, diversifiable risk and residual risk, this type of risk refers to the uncertainty related to investing in a particular company or industry.

Examples include a change in management, a product recall, a regulatory change that could drive down company sales, and a new competitor in the marketplace with the potential to take away market share from a company in which you’re investing. In contrast to systematic risk, unsystematic investment risk is the company or industry-specific risk that is inherent in each investment. This type of risk can be alleviated through diversification.

Using our previous example, let’s take Mike’s $1,000 investment in Google's parent company, Alphabet Inc. Let's say that the day after investing money in the company, Mike reads in the daily newspaper that the current CEO of Google resigns! This concerns investors because that particular CEO is the person who made Google successful and now he’s gone! As a result, Mike’s investment plummets. Although this is bad for Mike’s investment in Google, his other investments shouldn’t be affected.