Definition of Idiosyncratic risk:
Research suggests that idiosyncratic risk accounts for most of the variation in the uncertainty surrounding an individual stock over time, rather than market risk. Idiosyncratic risk can be thought of as the factors that affect an asset such as the stock and its underlying company at the microeconomic level. It has little or no correlation with risks that reflect larger macroeconomic forces, such as market risk. Microeconomic factors are those that affect a limited or small portion of the entire economy, and macro forces are those impacting larger segments or the entire economy.
The possibility that the price of an asset may decline due to an event that could specifically affect that asset but not the market as a whole. For example, if a company suffers a major plant closure due to a disaster, its stock price may be affected while the rest of the market is not. Idiosyncratic risk can be reduced through proper diversification. Also called unsystematic risk.
Idiosyncratic risk is a type of investment risk that is endemic to an individual asset (like a particular company's stock), or a group of assets (like a particular sector's stocks), or in some cases, a very specific asset class (like collateralized mortgage obligations). Idiosyncratic risk is also referred to as a specific risk or unsystematic risk. Therefore, the opposite of idiosyncratic risk is a systematic risk, which is the overall risk that affects all assets, such as fluctuations in the stock market, interest rates, or the entire financial system.
How to use Idiosyncratic risk in a sentence?
- Idiosyncratic risk refers to the inherent factors that can negatively impact individual securities or a very specific group of assets.
- Idiosyncratic risk can generally be mitigated in an investment portfolio through the use of diversification.
- The opposite of Idiosyncratic risk is a systematic risk, which refers to broader trends that impact the overall financial system or a very broad market.
Meaning of Idiosyncratic risk & Idiosyncratic risk Definition