How does unsystematic risk differ from systematic risk?

Unsystematic risk is specific to an individual asset or company, which sets it apart from systematic risk that affects the entire market or a particular sector. This type of risk arises from factors such as management decisions, business environment, or industry-specific events that impact a single company's performance. For example, if a company faces a lawsuit or a significant shift in management, the risk involved primarily affects only that entity, not the overall market.

This characteristic of unsystematic risk allows investors to reduce its impact through diversification. By holding a variety of investments across different companies and industries, investors can mitigate the effects of risks associated with individual assets. Therefore, the correct answer highlights the unique nature of unsystematic risk as it pertains specifically to individual securities rather than the market as a whole. Understanding this distinction is critical for effective risk management and investment strategy.