Unsystematic Risk (Diversifiable Risk)

Unsystematic risk is risk specific to a single company or industry, like a factory fire, a failed product launch, or a lawsuit, that does not affect the broader market. Unlike systematic risk, it can be substantially reduced or eliminated by holding a diversified portfolio of many unrelated positions.

This is the mathematical justification for diversification itself: if one holding's company-specific bad news is unrelated to another holding's fortunes, combining them smooths out the company-specific bumps while systematic, market-wide risk remains along for the ride regardless of how many positions you hold.