Unsystematic Risk

What is Unsystematic Risk?

Unsystematic risk can be termed as the risks generated in a particular company or industry and may not be applicable to other industries or economies as a whole. For example, the telecommunication sector in India is going through disruption; most of the large players are providing low-cost services, which are impacting the profitability of small players with small market share. As telecommunication is a capital-intensive sector, it requires enormous funding. Small players with low profitability and high debt are exiting the business.

Types of Unsystematic Risk

It is classified into two categories, namely:

Types of Unsystematic Risk

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Examples of Unsystematic Risk

Example #1

ABC Limited is an automobile manufacturing company based in Europe. Due to a recent strike by the workers of the particular region, the manufacturing plant is closed, and the production activities are stopped for a while. But the demand of automobiles is the same, and the overall economic growth is intact. Thus, the above crisis can be sorted by means of conversation with the workers.

Unsystematic-Risk

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Example #2

Unsystematic risks occur in case of large portfolios or funds under management. Suppose fund X has 15% exposure in the agriculture industry in Europe. Due to low harvesting in conditions across Europe, commodity prices have jumped up, followed by a slump in demand and reducing yields to the farmers. It is a pure case of unsystematic risk, and the matter is related to the agricultural segment in Europe only. So, the portfolio manager can divert the funds which are exposed to the agricultural industry. The funds can be diverted to US consumption, as the sector is going very strong in the recent past.

Advantages

Disadvantages

  • While even if the entire economy is going fine, a series of unsystematic risk can act as a hazard to the particular industry or the business. The profitability may be impacted due to the series of disruption to the business.
  • Sometimes due to geopolitical crises, the risks cannot be avoided, and it takes a long time to settle. While due to lower productivity, investors and businessman feels the pinch as the demand for the product diminishes due to long unavailability of the product.
  • Change of demand, change in preference of consumer taste may happen when the product is not available to the consumer. For example, lower availability of tea and tea-based products, the consumers might change the preference to coffee and coffee-based products. Thus, the above unsystematic risk can change the preference of the customers, leaving a permanent impact on the sector.
  • The nature of risk in cases of unsystematic is not repetitive, and most of the time, there is an evolution of new hazards. The policymakers face challenges in resolving the risks as they have to deal with the utmost attention because of its nature.
  • The critical situation may hinder the sentiment of the business. Many workers, employers may be badly affected due to the hazards. While in the case of systematic risks, the situations can be handled because of the known challenges associated with it.
  • Policymakers have to implement a large pool of resources to resolve the situation. Sometimes the cost of measures becomes very expensive compared to the matter itself.
  • Any kind of risk is unacceptable to the economy, be it systematic or unsystematic. The overall impact of the situation becomes negative to the common masses.

Limitations

Conclusion

The unsystematic risk is very much dynamic; the nature of problems is varied from each other. The enterprise which faces these problems experiences growth in profitability while the whole economy is going fine. There is no correlation with the broader economy, and the policymaker does not pay attention to the situation as the nature of the risks are focused to the specific industry or sectors, which could be eliminated by means of private participation only.

This article has been a guide to what is an unsystematic risk and its definition. Here we discuss types and examples of unsystematic risk along with limitations, advantages, and disadvantages. You can learn more about accounting from the following articles –

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