Unsystematic risk, also known as “specific risk,” “diversifiable risk” or “residual risk,” is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. For example, news that is specific to a small number of stocks, such as a sudden strike by the employees of a company you have shares in, is unsystematic risk.
Systematic risk, also known as “market risk” or “un-diversifiable risk”, is the uncertainty inherent to the entire market or entire market segment.
It is generally assumed that a rational investor does not have any unsystematic risk in his portfolio.
