Which of the following best describes unsystematic risk?

Unsystematic risk refers to the risk associated with individual assets or companies, as opposed to the entire market. This type of risk is specific to a particular industry or company and is influenced by factors such as management decisions, financial performance, product recalls, or other events that impact a specific entity.

The core concept behind unsystematic risk is that it can be mitigated or eliminated through diversification. By holding a variety of assets in a portfolio, the potential negative impact of an adverse event affecting one specific investment is lessened because other investments may not be affected in the same way or at all.

This characteristic highlights the importance of diversification in investment strategies, emphasizing that while some risks inherently affect all market participants (such as market risk), unsystematic risks can be managed through careful selection of a diverse range of investments. Therefore, this concept forms a fundamental principle in finance and portfolio management.