# Unsystematic Risk: Definition, Types, and Measurements

> **Definition**
>
> Unsystematic risk is a potential hazard that is unique to a company or an industry sector and can be mitigated by the investor through diversifying holdings.

## What Is Unsystematic Risk?

Unsystematic risk is a hazard that could damage a single company or an industry sector while having little or no impact on the broader world of investments. Unsystematic risk is also known as diversifiable risk because the wise investor can reduce its impact by balancing investments across multiple companies and sectors.

The opposite of unsystematic risk is systematic risk. Airlines, for example, face unsystematic risks of labor strikes, weather disruptions, and regulatory changes. Most industries face systematic risks of an economic downturn, higher fuel prices, and geopolitical disruption.

### Key Takeaways

*   Unsystematic risk can affect a single company, such as a threat from a new competitor, a corporate scandal, or a major lawsuit.
*   It can also be inherent throughout an industry, such as a shortage of available drivers in the trucking industry.
*   The diversified investor cushions losses from unsystematic risk by selecting stocks from different industries that face different challenges.
*   Systematic risks like economic downturns affect all businesses, but not all are hurt equally.

![Unsystematic Risk: The uncertainty inherent in a company or industry investment.](https://www.investopedia.com/thmb/HiDogdBh7SIPkx5rQRv4ow6HaGE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Unsystematicrisk_final-31b6d4ce82394ebe8fbebeb331c3fc29.png)

*There is no formula to calculate unsystematic risk; instead, subtract systematic risk from total risk. — Michela Buttignol / Investopedia*

## Understanding Unsystematic Risk

[Examples of unsystematic risk](https://www.investopedia.com/ask/answers/040715/what-are-some-common-examples-unsystematic-risk.asp) include a new competitor in the marketplace with the potential to take significant market share from the company in which you’re invested, a regulatory change (which could drive down company sales), a shift in management, or a [product recall](https://www.investopedia.com/terms/p/product_recall.asp). Unsystematic risk can be described as the doubt that is intrinsic in a company or industry investment.

While investors may be able to anticipate some sources of unsystematic risk, it is nearly impossible to be aware of all risks. For instance, an investor in healthcare stocks may be aware that a major shift in health policy is on the horizon, but may not fully know the particulars of the new laws and how companies and consumers will respond.

Other examples of unsystematic risks include strikes and outcomes of legal proceedings. This risk is also known as a diversifiable risk since it can be eliminated by sufficiently [diversifying a portfolio](https://www.investopedia.com/terms/d/diversification.asp). There isn’t a formula for calculating unsystematic risk. Instead, it must be extrapolated by subtracting the systematic risk from the total risk.

## Types of Unsystematic Risk

### Business Risk

Both internal and external issues may cause [business risk](https://www.investopedia.com/terms/b/businessrisk.asp). Internal risks are tied to operational efficiencies. For example, if a company plans to open a new factory, a construction delay would be an internal risk, as it may result in the loss of competitive advantage.

### Financial Risk

[Financial risk](https://www.investopedia.com/terms/f/financialrisk.asp) relates to the capital structure of a company. A company needs to have an optimal level of debt and equity to continue to grow and meet its financial obligations. A weak capital structure may lead to inconsistent earnings and cash flow that could prevent a company from trading.

When the Federal Reserve raises interest rates, some companies may be stuck with lower-yielding investments. With interest rates moving higher, they would presumably seek to replace existing low-yield debt with newer, higher-yielding debt investments. However, the higher rates lower the resale value of existing debt investments, meaning the holders are stuck either selling for a loss or missing out on higher rates.

### Operational Risk

[Operational risks](https://www.investopedia.com/terms/o/operational_risk.asp) can result from unforeseen or negligent events, such as a breakdown in the supply chain or a critical error being overlooked in the manufacturing process. A security breach could expose confidential information about customers or other types of key proprietary data to criminals.

Operational risk is tied to operations and the potential for failed systems or policies. These are the risks for day-to-day operations and can result from breakdowns in internal procedures, whether tied to systems or employees. For example, a refinery may experience a leak from one of its holding tanks, shutting down production until the damage can be repaired. Meanwhile, the refinery is offline and not producing the refined products that customers are demanding, leaving the refinery without any income for a period of time.

### Strategic Risk

A strategic risk may occur if a business gets stuck selling goods or services in a dying industry without a solid plan to evolve the company’s offerings. A company may also encounter this risk by entering into a flawed partnership with another firm or competitor that hurts its future prospects. In the current environment, there is a rush to develop electric cars, for example, opening up a whole new field of competition within the auto industry. Those late to the game are facing significant strategic risk.

### Legal and Regulatory Risk 

[Legal and regulatory risk](https://www.investopedia.com/terms/r/regulatory_risk.asp) is the risk that a change in laws or regulations will hurt a business. These changes can increase operational costs or introduce legal hurdles.

When the U.S. [Food and Drug Administration (FDA)](https://www.investopedia.com/terms/f/fda.asp) bans a specific drug, that is an example of regulatory risk for the company that produces the drug. Other types of legal risk can include errors in agreements, class-action lawsuits, or legal violations.

More drastic legal or regulatory changes can even stop a business from operating altogether, such as in April 2024, when then-President Joe Biden [signed a bill to ban TikTok](https://www.investopedia.com/here-is-what-analysts-expect-as-biden-signs-bill-that-could-ban-tiktok-into-law-8638090) unless its Chinese owners sold it within one year. As of June 2025, that [deadline has been extended](https://www.investopedia.com/trump-extends-tiktok-ban-deadline-again-what-you-need-to-know-11758216) to give the company time to find a U.S. buyer.

## Unsystematic Risk vs. Systematic Risk

The total risk for investments is unsystematic risk plus systematic risk. Unsystematic risk is a risk specific to a company or industry, while systematic risk is the risk tied to the broader market—also [referred to as market risk](https://www.investopedia.com/ask/answers/042415/how-does-market-risk-differ-specific-risk.asp). Systematic risk is attributed to broad market factors and is the investment portfolio risk that is not based on individual investments.

Systematic risks can include interest rate changes, recessions, or inflation. Systematic risk is often calculated with [beta](https://www.investopedia.com/terms/b/beta.asp), which measures the volatility of a stock or portfolio relative to the entire market. Meanwhile, company risk is a bit more difficult to measure or calculate.

> **Important**
>
> Systematic and unsystematic risks can be mitigated, in part, with risk management. Systematic risk can be reduced with asset allocation, while unsystematic risk can be limited with diversification.

## Example of Unsystematic Risk

By owning a variety of company stocks across different industries, as well as by owning other types of [securities](https://www.investopedia.com/terms/s/security.asp) in a variety of asset classes, investors can reduce the impact of single events.

For example, an investor who owns nothing but airline stocks would face a high level of unsystematic risk (also known as [idiosyncratic risk](https://www.investopedia.com/terms/i/idiosyncraticrisk.asp)). They would be vulnerable if airline industry employees went on strike, which could temporarily sink airline stock prices. Simply the anticipation of this news could hamper their portfolio.

By adding [uncorrelated](https://www.investopedia.com/terms/c/correlation.asp) holdings to their portfolio, such as stocks outside of the transportation industry, the investor would spread out air-travel-specific concerns. Unsystematic risk, in this case, affects not only specific airlines but also other industries that airlines do business with, such as large food companies. In this regard, the investor could diversify away from public equities altogether by adding U.S. Treasury bonds as additional protection from fluctuations in stock prices.

Even a portfolio of well-diversified assets cannot escape all risk, however. The portfolio will still be exposed to [systematic risk](https://www.investopedia.com/terms/s/systematicrisk.asp), which refers to the uncertainty that faces the market as a whole and includes shifts in interest rates, recessions, financial crises, wars, and natural disasters.  

## Explain Unsystematic Risk Like I’m 5 Years Old

Investors try to measure all the risks of an asset to estimate their potential losses. Some risks are common across all assets. If a recession occurs or interest rates go up, every company will be affected. This is called systematic risk.

Unsystematic risk is the risk that is specific to a particular company or industry. Some companies might have bad leadership or face lawsuits, or they might be vulnerable to weather events that affect their supply chains. Investors can limit unsystematic risk by investing in a variety of different businesses and industries.  

## What Are Examples of Unsystematic Risk?

Key examples of unsystematic risk include management inefficiency, flawed business models, liquidity issues, regulatory changes, or worker strikes.

## What Is the Difference Between Systematic Risk and Unsystematic Risk?

Systematic risk is not diversifiable (i.e., cannot be avoided), while unsystematic risk can generally be mitigated through diversification. Systematic risk affects the market as a whole and can include purchasing power or interest rate risk.

## What Are Types of Unsystematic Risk?

There are five types of unsystematic risk: business, financial, operational, strategic, and legal/regulatory risk.

## How Is Unsystematic Risk Measured?

In stock investing, unsystematic risk can be measured by the unsystematic variance. That is calculated by subtracting systematic variance from the total variance.

## The Bottom Line

Unsystematic risk is diversifiable, meaning that you can reduce this risk if you buy shares of different companies across various industries. Unsystematic risks are often tied to a specific company or industry and can be avoided by building a well-diversified portfolio.

Systematic risk is a non-diversifiable risk or a measure of overall market risk. These factors are beyond the control of the business or investor, such as economic, political, or social factors. Meanwhile, events that affect a specific company are unsystematic risks, such as a labor strike or the FDA denying a new drug.

> **Article Sources**
>
> 1.  CBS News. “[TikTok Ban Measure Signed by Biden. Here’s What Could Happen Next.](https://www.cbsnews.com/news/tiktok-ban-bill-why-is-tiktok-getting-banned-senate/)”
>     
> 2.  NBC News. “[Trump Extends TikTok Ban Deadline by Another 90 Days](https://www.nbcnews.com/tech/social-media/trump-extends-tiktok-ban-deadline-another-90-days-rcna213720).”