specific risk


Specific risk

See: Unique risk

Nonsystematic Risk

Risk that is unique to a certain asset or company. An example of nonsystematic risk is the possibility of poor earnings or a strike amongst a company's employees. One may mitigate nonsystematic risk by buying different of securities in the same industry and/or by buying in different industries. For example, a particular oil company has the diversifiable risk that it may drill little or no oil in a given year. An investor may mitigate this risk by investing in several different oil companies as well as in companies having nothing to do with oil. Nonsystematic risk is also called diversifiable risk. See also: Undiversifiable risk.

specific risk

or

diversifiable risk

that part of total risk (within the CAPITAL-ASSET-PRICING MODEL) uniquely attributable to the holding of a specific financial security. Unlike MARKET RISK, specific risk is independent of general market variations. Events unique to a particular security may comprise such corporate decisions as dividend policy, changes in capital structure, recruitment of top personnel and so forth. Changes in a firm's share price may be positive or negative depending upon the opinion of investors. The argument is that such specific variations occur randomly and therefore if a sufficiently large and well-diversified PORTFOLIO of shares is held, such variations will cancel each other out. This means that investors can eliminate specific risk by diversifying their portfolio.