Firm-specific risk is also called unsystematic risk or diversifiable risk. It is the risk that is specific to a particular company or industry and can be diversified away by investing in a large number of different companies or industries. Systematic risk, on the other hand, is the risk that cannot be diversified away and affects all investments to some degree.
What is Firm-Specific Risk?
Firm-specific risk is also called unsystematic risk and business risk. Firm-specific risk is the volatility of a company’s stock price that is caused by events that affect only that particular company. Examples of firm-specific risks include things like changes in management, new product failures, lawsuits, natural disasters, and changes in government regulations.
Sources of Firm-Specific Risk
There are many sources of firm-specific risk, but they can broadly be categorized into two main types: financial risk and operational risk.
Financial risk includes factors such as the company’s leverage ratio, its exposure to interest rate changes, and its historical performance. Operational risk includes factors such as the company’s management team, its business model, and its competitive environment.
Both financial and operational risks can have a significant impact on a company’s share price, so it is important to understand both types of risk when assessing a stock.
How to Measure Firm-Specific Risk
Firm-specific risk, also called company-specific risk or unsystematic risk, is the risk that is inherent to a particular company. This type of risk can be diversified away by holding a portfolio of stocks, but it can’t be diversified away completely. There are two primary ways to measure firm-specific risk: beta and standard deviation.
Beta is a measure of how sensitive a stock is to movements in the overall market. A beta of 1 means that the stock moves in line with the market, while a beta of 2 means that the stock is twice as sensitive to market movements. A beta of 0.5 means that the stock is half as sensitive to market movements.
Standard deviation is a measure of how volatile a stock is. A stock with a high standard deviation is more volatile than one with a low standard deviation. Standard deviation can be used to calculate something called ” downside risk,” which is the amount of loss that an investor would incur if the stock fell by a certain amount.
In conclusion, firmspecific risk is also called and . This type of risk is often caused by factors unique to a particular company, such as poor management or an unstable economic environment. While diversification can help reduce this type of risk, it is not always possible to completely eliminate it. Therefore, it is important for investors to be aware of the potential for firmspecific risk when making investment decisions.