What is 'nonsystematic risk' commonly known as?

Nonsystematic risk is commonly referred to as firm-specific risk. This type of risk is associated with a particular company or industry rather than the market as a whole. It arises from factors that can affect a specific organization, such as management decisions, competitive positioning, financial health, and operational issues.

Investors can often mitigate nonsystematic risk through diversification—by holding a variety of securities from different sectors or industries, the impact of any one firm’s poor performance on the overall portfolio is reduced. This distinct separation from market-wide risk—also known as systematic risk, which affects all stocks—highlights the uniqueness of firm-specific risk as it is linked to events that are exclusive to individual companies.

In contrast, terms like market risk or systematic risk refer to risks that affect the entire market or a large segment, while investment risk is a broader term that can encompass both systematic and nonsystematic risks. Understanding the concept of firm-specific risk is critical for effective portfolio management and risk assessment.