Unique risk is also referred to as

Question

BlackTom AI · Accepted Answer

Unique risk (also called idiosyncratic risk) arises from factors that affect a single firm or a small group of firms, so it is appropriately called diversifiable risk and firm-specific risk.

1) Relevant knowledge points and concepts
- Risks are commonly split into systematic (market) risk and unsystematic (unique/idiosyncratic) risk.
- Systematic (market) risk affects the entire market and cannot be eliminated by diversification.
- Unsystematic (unique/firm-specific) risk affects individual companies and can be reduced or eliminated by holding a well-diversified portfolio. In CAPM, only systematic risk is priced; unique risk is diversifiable and thus not rewarded.

2) Step-by-step reasoning
Step 1: Identify what “unique risk” means — it is risk tied to a specific firm (e.g., management decisions, product recalls, lawsuits).
Step 2: Determine whether that risk is diversifiable — because those events affect only some firms, an investor can offset them across many holdings, so the risk is diversifiable.
Step 3: Map the terminology — terms that correctly label unique risk include “firm-specific risk,” “idiosyncratic risk,” “unsystematic risk,” and “diversifiable risk.” Terms like “systematic” or “market” risk refer to nondiversifiable, economy-wide sources and thus do not match.

3) Intermediate logical steps shown
- Unique risk → affects only particular firms → can be reduced by diversification → therefore it is diversifiable.
- Because it originates at the firm level, the label “firm-specific” directly applies.

4) Why the correct answer is correct
“Diversifiable risk, and firm-specific risk” correctly pairs the two standard synonyms for unique risk: it is both reducible through diversification and specific to individual firms.

5) Why other options are incorrect (briefly)
- “Systematic risk, and diversifiable risk”: contradictory—systematic risk is nondiversifiable.
- “Systematic risk, and market risk”: both refer to economy-wide risk, not unique/firm-level risk.
- “Diversifiable risk, and market risk”: “market risk” is nondiversifiable, so incorrect pairing.
- “Nonsystematic risk, and nondiversifiable risk”: nonsystematic (another name for unique) is diversifiable, so pairing with nondiversifiable is wrong.

Conclusion: The correct answer is “diversifiable risk, and firm-specific risk,” which matches the provided answer.

Unique risk is also referred to asSingle choice

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