9 Examples of Unsystematic Risk

John Spacey, January 30, 2020

Unsystematic Risk is any risk that is specific to a company as opposed to the entire economy or an entire industry. Generally speaking, investors can reduce their exposure to unsystematic risk by diversifying their investments. By contrast, systemic risk that applies to an entire economy, industry or sector is more difficult to reduce with diversification. The following are illustrative examples of unsystematic risk.

Financial Risk

Financial risk is a broad category of risks that stem from the financial health, position and sustainability of a firm. For example, the risk that a firm with a large debt will fail to come up with enough liquidity to make a debt payment. Missing a debt payment can trigger a series of events that cause a firm to completely fail as creditors lose confidence in the firm and compete to pull their funding from the firm as quickly as possible.

Competitive Risk

Competitive risk is the risk that a firm will fall behind the competition in their industry such that revenue declines. For example, the risk that a shoe company will launch an entire line of shoes that consumers view as unattractive.

Operational Risk

Operational risk is the potential for the core revenue generating processes of a firm to fail in some way. For example, a firm that has quality control issues such that they release an unsafe product.

Strategy Risk

A risk that is specific to the strategy of a firm such as a firm that bets on a consumer trend that doesn't materialize.

Legal Risk

The potential for a costly legal dispute or liability.

Compliance Risk

The risk that a firm will fail to comply with laws and regulations.

Reputational Risk

Events that damage a firm's reputation amongst stakeholders such as investors, regulators, customers and employees. For example, a food safety issue that causes sales to plummet, brand image to be damaged, regulators to investigate and investors to flee.

Pure Risk

Pure risks are risks that have only a downside such that they can be insured. This includes things like fires and disasters. For example, a fire at a factory that disrupts a firm's operations for six months.

Inherent Risk

Inherent risk is the risk that a firm is misrepresenting its financial or competitive position. For example, a medical firm that claims to have a revolutionary product that is in fact a fraud.

Overview: Unsystematic Risk
Type	Investing Risk
Definition	A risk that is specific to a company as opposed to the entire economy or an entire industry.
Related Concepts	Investing Risk » Risk » Risk Exposure » Systemic Risk » Financial Risk » Competitive Risk »