Unsystematic Risks

What this video covers

• The definition of unsystematic risk (diversifiable risk) as risk specific to a company, industry, or issuer, and why the word "diversifiable" is the magic term on the exam
• Credit risk (default risk): the risk that a bond issuer fails to make interest or principal payments, why U.S. Treasuries have virtually no credit risk, and how credit ratings measure it
• Financial risk versus issuer-specific risk (business risk): why a company with great operations can still go bankrupt from too much leverage, and which risk measures debt burden versus operations quality
• Legal and regulatory risk: how laws, lawsuits, or environmental regulations target one specific company or industry
• Liquidity risk, call risk, and political risk: the three sneaky unsystematic risks beyond the core four, including illiquid examples like direct participation programs (DPPs) and non-traded real estate investment trusts (REITs)
• Political risk versus geopolitical risk: why political risk is unsystematic (targets one country) and geopolitical risk is systematic (sweeps the global market)
• The systematic versus unsystematic comparison table: scope, diversification, beta, and the critical exam trap distinguishing diversification (many securities, cancels company-specific risk) from asset allocation (mix of asset classes, reduces market-wide risk)