What is an example of unsystematic risk?

Unsystematic risk refers to the type of risk that is specific to a particular company or industry, which can be reduced or eliminated through diversification. Business risk falls into this category because it is directly tied to the operational and financial challenges that a specific company faces, such as management decisions, competitive pressures, and regulatory changes that affect that particular firm.

For instance, if a company faces a lawsuit or has a product recall, these events would directly impact its stock performance without necessarily affecting the broader market. Investors can mitigate this risk by diversifying their portfolio across different sectors, which would lessen the impact that any one company's business issues would have on their overall investment performance.

In contrast, the other types of risks mentioned, such as interest rate risk, market risk, and liquidity risk, are considered systematic risks. These risks affect the entire market or a larger segment of the market, making them unavoidable through diversification alone. Therefore, understanding that business risk exemplifies unsystematic risk is crucial for investment strategy and risk management.