Anna knows more about systematic risk of winfit, also called general market risk. However, she wants to understand both risks before buying winfits stocks. Hence, she is wondering about the meaning of winfits unsystematic risk.
Unsystematic risk describes an industry or company specific risk that is part of each investment. This risk concerns a specific company and is therefore also called “specific or risidual risk”.
In contrast to systematic risk, diversification (buying different assets in different industries) can reduce unsystematic risk.
A unsystematic risk for winfit is the increase of the price for cotton, since most of their sports clothes are made out of this material. If the cotton price increases, winfits profit margin decreases. In order to minimize this risk, Anna could also buy commodities (like cotton).
This diversification reduces the unsystematic risk, but not the systematic risk. While looking at the overall risk of an investment, the major parts are specific, unsystematic risks while a smaller portion includes the systematic risk.
Typical examples for unsystematic risk include new competitors, new law regulations or the price increase of raw materials.