Unsystematic risk refers to the organization risk that is inherent in an investment. The unsystematic risk is different for each investment for a company and takes into account potential effects on the asset if a specific event occurs that could negatively impact the investment. Unsystematic risk can be reduced by diversifying investments and increasing the overall number of investments. Another term for unsystematic risk is the residual risk for an investment. Unsystematic risk is measured through the mitigation of the systematic risk factor through diversification of your investment portfolio. The systematic risk of an investment is represented by the company's beta coefficient.
Find the beta coefficient for your stock investment. The beta coefficient for publicly traded companies can be found on any online investment service, such as MSN Money or USAA Online Stock trading. For this example, IBM and EBay are used. IBM has a beta coefficient of 1.05 and EBay of 1.45.
Determine the amount of your investments to place in each company. Since IBM has a lower beta, the unsystematic risk can be reduced by placing a greater percentage of your investment into this company. For this example, 50 percent of the investment will be placed in each company.
Determine the overall beta (and resulting risk) of your investment portfolio through applying the following formula: Beta (total) = Percentage of Overall Investment 1 x (Beta Investment 1) + Percentage of Overall Investment 2 x (Beta Investment 2). Beta (Total) = .50 * (1.05) + .50 * (1.45) = 1.25
Based in Memphis, Jackson Lewis has been writing on technology-related material for 10 years with a recent emphasis on golf and other sports. He has been freelance writing for Demand Media since 2008. Lewis holds a Master of Science in computer science from the United States Naval Postgraduate School.