2.19 Non-Systematic Risk (Specific Risk)
Non-systematic risk is unique to a specific firm or industry. Holding a diversified portfolio of 25-30 uncorrelated stocks virtually eliminates non-systematic risk.
Key FINRA Exam Takeaways
- Non-Systematic Risk: Company-specific or industry-specific risk; CAN be eliminated through diversification.
- Types: Business risk, Financial (Credit) risk, Regulatory/Legislative risk, Liquidity risk.
- Measured by Alpha: Value added or subtracted by an active manager beyond the market return.
Knowledge Checkpoint • Section 2.19
An investor holds a concentrated portfolio consisting entirely of common stock in one regional airline company. Which risk is this investor most heavily exposed to that could be reduced by diversification?