Diversifiable risk

Diversifiable risk is simply risk that is specific to a particular security or sector so its impact on a diversified portfolio is limited.

An example of a diversifiable risk is the risk that a particular company will lose market share. It will not have any impact on other companies in a diversified portfolio, so the only loss to an investor holding shares in the company will be the decline in that one share.

On the other hand a rise in interest rates will reduce the value of all shares and bonds. This means that it is not possible to diversify interest rate risk away.

Of course, non-diversifiable risks can be controlled by hedging. It is also possible to choose securities that are less exposed to non-diversifiable risks: for example, a portfolio that is overweight on defensives is less vulnerable to an economic slowdown, but at the cost of lower expected returns.