Idiosyncratic risk - Definition

A risk that is specific to an investment is called an idiosyncratic risk. In the case of stocks it is also known as stock specific risk. For example, a company may experience a production delay which brings stock prices down as consumers become concerned and analysts estimate sales and Earnings not meeting expectations.

This type of risk is small. Idiosyncratic risk affects securities associated with a particular company only, for lengths of time which can vary, depending on the nature of the risk. Also known as unsystematic risk, it can be difficult if not impossible to predict, even for skilled investors who watch the market closely. In portfolio theory, risks of price changes due to the unique circumstances of a specific security, as opposed to the overall market, are called idiosyncratic risk. This risk can be virtually eliminated from a portfolio through diversification -- holding multiple securities means the movements of individual securities "Cancel out".



Terms near "Idiosyncratic risk"

IDR
If done order
If-converted method
Illegal dividend
Illiquid
Illiquid assets
ILS
Implied Volatility
In the Money
Index Funds
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