Term: Idiosyncratic Risk

CFA Level I Glossary

Idiosyncratic risk is firm-specific risk that can be reduced or eliminated through diversification in a large portfolio. Examples include a plant fire or a product recall that does not move the whole market. In the CAPM world, investors are not compensated for bearing diversifiable idiosyncratic risk. Confusing it with systematic risk, which is market-wide and rewarded, is fundamental.

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