What is Unsystematic Risk?
Unsystematic risk, also called specific risk or idiosyncratic risk, is the portion of an asset’s risk that comes from factors unique to the company or industry, such as management decisions, product recalls or competitive moves. Unlike systematic risk, it can be diversified away by holding a broad portfolio.
How It Works
- Identify company-specific drivers (strategy, leadership, lawsuits, single-customer exposure).
- Quantify how much of total return variability comes from those drivers.
- Diversify across many companies and sectors to reduce specific exposures.
- Track residual return after removing market movement to monitor remaining specific risk.
Saudi Context
A Saudi investor heavily concentrated in one petrochemical issuer carries unsystematic risk that disappears once they spread holdings across multiple Tadawul sectors.
Example
If a listed retailer announces fraud and its share drops 40 percent in a day, that loss is unsystematic risk; the broader Tadawul index may barely move.