Systematic and Unsystematic Risk
Risk is often thought about in terms of an investor’s entire portfolio of securities, rather than in terms of a specific security. A portfolio of securities will be susceptible to two kinds of risk: systematic and unsystematic.
Systematic risk is the risk that the entire market will drop, dragging with it the performance of an individual stock or portfolio. Systematic risk is also referred to as market risk. If the performance of a portfolio drops due to systematic risk, it has dropped because the whole market has dropped, not because of the performance of the specific companies within the portfolio.
Unsystematic risk is the risk that the value of the specific securities within the portfolio will decline due to factors specific to the companies issuing the security. This may be because of a decline in earnings or a decline in the company’s Standard & Poor’s rating.
The amount of unsystematic risk in a p