Definition of Unsystematic Risk

Unsystematic risk is a risk that is company or industry-specific. Unlike systematic risk, unsystematic risk can be reduced by diversification. For an investor who has invested all his savings in the IT sector and purchased the shares of IBM, DELL, and SAMSUNG. Suddenly the government decides to upgrade the internet coverage to 4G. This lead to a sudden decline in SAMSUNG share price as most of its devices was 3G supported that were not saleable now.

Through diversification, the unsystematic risk can be reduced to an acceptably low level. Diversification means that an investor should invest different proportions in different industrial sectors, like 25% in construction companies stocks, 50% in secured bonds, 10% in the automobile sector, 15% in insurance companies stocks, etc. The result of this combination will off-set any negative returns from any one sector.