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.