What is a Specific Risk?
How Does a Specific Risk Work?
Specific risk is the risk of an event occuring that would directly or indirectly affect the market value of an asset or particular group of assets. For example, a rumor of a shortage of raw silicon is a specific risk to which computer and high-tech stocks would be exposed. Specific risk should not be confused with systematic risk, which is the risk of an event that would directly affect the entire market (e.g. recession, etc.)
Why Does a Specific Risk Matter?
Since specific risk affects only a type of asset in a market and not all assets, specific risk can be mitigated by diversification. In fact, all expected rates of return are calculated without specific risk because the assumption is that any rational investor is capable of diversifying away specific risk. If you fail to diversify (which means you're taking on more risk) you cannot expect to receive higher reward.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
When a company dumps an executive, it's definitely a sign that it's time to step back, look at the big picture, and try to get a feeling for whether the news is a positive or negative for the...Read More →
The cost of tuition has skyrocketed in the last 30 years. According to Bloomberg, college tuition fees have jumped more than 13-fold since...Read More →