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Portfolio Specific Risk Definition and Quiz

Most institutions operate in a relative world where active manager risk is decomposed into a specific risk component and a market risk component.
  1. Define - Define the term Portfolio Specific Risk.
  2. Context - Use Portfolio Specific Risk in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 18, 2021
Portfolio Specific Risk provides a view as to how much of a manager's performance came from market-specific factor exposures versus active exposures.

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Understanding Portfolio Specific Risk and Systematic Risk


Portfolio Specific Risk is a measure of risk outside of those risks associated with a market or benchmark portfolio. To find portfolio specific risk, a regression of returns is run and portfolio variance is decomposed into a systematic component and a specific component.

Synonyms: portfolio residual risk, portfolio unsystematic risk

The two measures required from a regression of portfolio returns versus market returns include the portfolio's beta and the residual from the regression. In the end, the two component parts of variance can be isolated and are additive.

The Beta^2 above means beta is squared. Standard Error refers to the square root of variance of the residual from the regression, which represents the firm-specific uncertainty.

For context, most individual and small professional investment advisory firms don't decompose risk into systematic and unsystematic components, but will supplement their analysis with R-squared which is related in that it shows the percent of variance related to systematic factors.

In a Sentence

Sue:  What's the main takeaway from providing portfolio specific risk for this new product?
Eve:  It's so consultants can see if we're active enough to justify our fees.


Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.

Videos can also be accessed from the YouTube Channel.

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Portfolio Specific Risk is best-suited for measuring relative risk instead of absolute risk. | True or False?


The higher the Portfolio Specific Risk is to Total Risk the less the risk is associated with active management decisions. | True or False?

False. It is related to higher active risk.

Questions or Comments?

Still unclear on Portfolio Specific Risk? Check out the Quant 101 Series, and specifically the tutorial titled Stock portfolio risk decomposition into systematic and risk and specific risk.

Related Terms

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/ factorpad.com / fin / glossary / portfolio-specific-risk.html

portfolio specific risk
active risk
portfolio unsystematic risk
tracking error
portfolio specific variance
standard deviation
active specific risk
dispersion of returns
residual risk of a portfolio
unsystematic portfolio risk
portfolio risk decomposition
portfolio residual risk
relative performance
benchmark performance
active portfolio management
portfolio systematic risk
performance measurement

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