How to Calculate Non-Systematic Risk

A systematic risk for bullfighters, where the investment is their life and the return is getting to keep it.

Non-systematic risk is risk that applies only to certain investments. For example, if one of your investments is a profit-sharing agreement in an aircraft construction plant, then a strike by the workers will be an example of non-systematic risk. It is a risk that only applies to that investment. This is in contrast to systematic risks, which affect entire systems and economies. A good example of systematic risk is a change in the exchange rate of a currency, which affects every single investment made in that currency.

Instructions

1. Eliminate any systematic risks from an investment. The best way to do this is to ask yourself a simple question: "Can this be hedged against?" Basically, a systematic risk is one where you can hedge by selling short or signing a futures contract.

2. Ask yourself if a risk can be eliminated through diversification. If the answer is yes, then it is non-systematic.

3. Establish whether the management of a company you are investing in can affect its risk. If so, then this is another non-systematic risk. Systematic risks cannot be managed against as they affect entire industries rather than single investments.

Tips & Warnings

• Diversification is the best way to avoid non-systematic risk.

References

• Investopedia: Unsystematic Risk
• Investopedia: Risk and Diversification: Different Types of Risk
• The Free Library: Accounting for Unsystematic Risk