Specific risk

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The specific, unsystematic or diversifiable risk is by definition the intrinsic risk of the financial asset in question, and that we can reduce through diversification.

It is therefore a risk that depends on many factors that depend on the company itself:

  • Balance of the company.
  • Results account.
  • Business plan.
  • Cash flows.
  • Management.
  • Products.
  • Business prospects.

It is a part of the total risk of a financial asset, which is broken down into systematic risk and unsystematic risk.

Total risk = Systematic risk + Unsystematic risk

It is therefore a risk that depends directly on the title in question and has full independence from the level of risk that exists in the market, it is measured by the volatility of the title.

We understand diversification as the combination of different assets that allow compensation for adverse movements in the assets that make up a portfolio. The most relevant portfolio diversification techniques are the following:

  • Selecting a greater amount of assets in our portfolio. According to various studies carried out, a suitable number of titles is between 10 and 20 titles. It is proven that adding more securities does not reduce the total risk of the portfolio (law of diminishing returns).
  • Select titles with negative or low correlations.
  • Select other types of assets that are not shares. Adding other assets to the portfolio such as fixed income is one way to diversify. However, there are other non-financial assets that can contribute other types of risk to the portfolio and that are conspicuous by their uncorrelation with the stock market, such as real assets. Its use as an alternative investment is frequent due to its uncorrelation (or negative correlation), with the evolution of the prices of traditional financial assets, in addition to providing the investment portfolio with a diversification effect, that is, in short, less risk.
  • Extension of the investment time horizon, the longer it is, the less the impact of the conjunctural circumstances and the more relevance the choice will have based on its intrinsic value and not on its market value.

The editor recommends:

Systematic risk

Tags:  accounting markets economic-analysis 

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