Unsystematic risk is defined as the risk:

Question

BlackTom AI · Accepted Answer

First, let's restate the question and options to ensure clarity about what we're analyzing.
Question: Unsystematic risk is defined as the risk:
Options:
1) derived solely from expected events.
2) that applies to an individual's portfolio.
3) associated with unexpected events of any nature.
4) that affects a small number of securities.
5) that affects the entire market.

Option 1: derived solely from expected events. This is misleading because unsystematic risk stems from idiosyncratic, company- or asset-specific factors, not merely from events that are anticipated. If anything, expected events could still contribute to ongoing risk, but the definition of unsystematic risk emphasizes factors unique to a few securities rather than predictable, broad phenomena.

Option 2: that applies to an individual's portfolio. While unsystematic risk does relate to the securities you hold, saying it applies to an individual's portfolio is too broad and vague. The key feature of unsystematic risk is its specificity to certain securities, not the entire portfolio as a concept. A portfolio can be diversified to reduce this risk, which is a clue about its idiosyncratic nature.

Option 3: associated with unexpected events of any nature. This captures part of the idea—unpredictable, idiosyncratic events can drive firm- or asset-specific risk. However, the phrase 'any nature' is overly broad and could imply all kinds of risk, including systematic factors, which would misclassify the scope. Also, not all unsystematic risks are necessarily tied to merely 'unexpected' events; some may arise from predictable corporate actions but still be specific to the security.

Option 4: that affects a small number of securities. This aligns with the standard definition of unsystematic risk: risk that is specific to a limited set of securities and can be mitigated through diversification across many assets. The impact being confined to a subset of securities is the hallmark that distinguishes it from market-wide or systematic risk.

Option 5: that affects the entire market. This describes systematic (market) risk, which cannot be eliminated simply by diversification because it influences nearly all assets due to broad economic, geopolitical, or macro factors.

In summary, each option contrasts a different aspect of risk types. The characteristic feature of unsystematic risk is its confinement to a small group of securities and its reducibility via diversification, which is precisely captured by option 4.

Unsystematic risk is defined as the risk:

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