Blog Home / Financial Terms / Idiosyncratic Risk

Idiosyncratic Risk

Idiosyncratic risk refers to the inherent factors that can negatively impact individual securities or a very specific group of assets.


What is Idiosyncratic Risk?

In the concept of Idiosyncratic Risk, the investors can decrease, or even eliminate, the level of company-specific risk in any individual share by owning a sufficiently broad, diversified portfolio. It refers to the underlying reasons that can negatively influence single security or a small group of assets. Systematic risk is the opposite of idiosyncratic risk, and it relates to more prominent tendencies that affect the entire financial system or a vast market.

Example of Idiosyncratic Risk:

Accounting fraud, cyberattacks, loss of key personnel, or any other issue which affects a specific company without affecting the rest of the market.

Following are how idiosyncratic risks can be avoided:

  • Holding a well-diversified portfolio reduces the impact of events on individual companies in the portfolio,
  • exposes the portfolio to general market risk, and
  • follows a pattern because when investors can diversify at minimal or no cost, they do so.

Importance of Idiosyncratic Risk:

Risk Professionals must understand the broad categories of risk. There are two levels of risks involved: company-specific risk and systematic risk. Hence, it is essential to understand the idiosyncratic risk to understand the risk dimensions well.


Owais Siddiqui
1 min read
Financial TermsCPD
Dow Theory: Understanding the Primary Trend and the Secondary Trend
Sagar Pujari 04 July 2022
Financial TermsFRM
What is Standard Deviation?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Hedging,Types and Importance
Owais Siddiqui 19 September 2022
Financial TermsFRM
What is Hedging?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Owais Siddiqui 19 September 2022


Leave a comment

Your email address will not be published. Required fields are marked *