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Unsystematic Risk

unsystematic risk

Unsystematic risk is the risk that is inherent in a specific company or industry. The presence of unsystematic risk means that the owner of a company’s securities is at risk of adverse changes in the value of those securities because of the risk associated with that organization.

Take, for example, the risk that transport operatives go on strike. If someone holds only stock from the transport industry, they would face high unsystematic risk. By investing in a range of companies and industries, unsystematic risk can be drastically reduced through diversification.

Examples of unsystematic risk are as follows:

  • A change in regulations that impacts one industry

  • The entry of a new competitor into a market

  • A company is forced to recall one of its products

  • A company is found to have prepared fraudulent financial statements

  • A union targets a company for an employee walkout

  • A foreign government expropriates the assets of a specific company

Factors Causing Unsystematic Risk:
  • Business Risk

Many external and internal issues can cause business risk.  Banning of a particular product that a company sells to legal authorities of a country is an example of external risk. Operational inefficiency and miscommunication of important information constitutes internal risk.

  • Financial Risk 

It deals with risk due to the debt equity ratio (or capital structure) of the company. An inefficient capital structure may hinder growth and may increase chances of financial distress.

  • Strategic Risk 

It occurs when a company lacks proper strategic planning before execution of important events.

  • Operational Risk 

It occurs due to negligent or unforeseen events like a supply chain breakdown or negligence of a critical process in the manufacturing process.   

  • Legal Risk

These risks include lawsuits filed against the company, changes in government regulations having major impact on a particular company etc.

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