In
finance, a specific risk is a
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
that affects a very small number of assets. This is sometimes referred to as "
unsystematic risk
In finance and economics, systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggreg ...
". In a balanced portfolio of assets there would be a spread between general market risk and risks specific to individual components of that portfolio. Determination of the extent of exposure to individual risks is made using models such as
Treynor-Black in which the optimal share of a security is inversely proportional to the square of its specific risk.
An example would be news that is specific to either one
stock or a group of companies, such as the loss of a patent or a major natural disaster affecting the company's operation.
Unlike
systematic risk
In finance and economics, systematic risk (in economics often called aggregate risk or undiversifiable risk) is vulnerability to events which affect aggregate outcomes such as broad market returns, total economy-wide resource holdings, or aggreg ...
or
market risk
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility.
There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...
, specific risk can be diversified away. In fact, most unsystematic risk is removed by holding a portfolio of about twenty-five to thirty securities.
References
Financial risk
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