Unsystematic risk, also called specific risk, idiosyncratic risk, or diversifiable risk, is the risk that is unique to a particular company, industry, or asset — arising from factors such as management decisions, competitive dynamics, regulatory changes affecting a specific sector, product recalls, litigation, or accounting fraud. Unlike systematic risk (market risk), which affects all securities simultaneously, unsystematic risk can be substantially reduced or eliminated through portfolio diversification. According to Modern Portfolio Theory, holding a well-diversified portfolio of 20 to 30 uncorrelated stocks eliminates most unsystematic risk, leaving only systematic market risk. For Indian investors, unsystematic risk is most pronounced in concentrated portfolios of mid-cap or small-cap stocks where company-specific events — such as a promoter fraud, a regulatory ban, or a key client loss — can cause severe stock-specific drawdowns with no offsetting gains elsewhere in the portfolio.
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