What is considered "unsystematic risk"?

Unsystematic risk refers specifically to the risks that are unique to a particular company or industry. This type of risk is not tied to market movements and can stem from various factors such as management decisions, product recalls, or competitive pressures within that specific sector. Because unsystematic risk is tied to individual entities rather than the market as a whole, it can be mitigated through diversification.

Investors can reduce their exposure to unsystematic risk by holding a portfolio of a variety of assets across different industries or sectors. This way, the negative performance of one investment can be offset by the positive performance of another, thus reducing the overall risk profile of the portfolio.

In contrast, the other options describe forms of risk that involve broader market influences or are systematic in nature. Market-wide risks affect all investments and cannot be mitigated through diversification, while risks associated with federal regulations typically impact industries or sectors rather than being unique to individual companies. Additionally, the overall economic risk that affects all industries speaks to systematic risks that cannot be diversified away.