Unsystematic risk, also known as specific risk, idiosyncratic risk, or diversifiable risk, refers to the uncertainty associated with individual companies or industries that can be reduced through diversification. Unlike systematic risk, which affects the entire market, unsystematic risk is unique to particular securities or sectors.

This type of risk encompasses factors such as management decisions, company financial health, industry-specific developments, regulatory changes affecting specific sectors, and competitive positioning. Understanding and managing unsystematic risk is crucial for portfolio construction and risk management.

The key insight of modern portfolio theory is that unsystematic risk can be significantly reduced or eliminated through proper diversification across uncorrelated assets, industries, and geographic regions. This makes unsystematic risk manageable and controllable, unlike systematic risk which cannot be diversified away.