Portfolio Specific Risk Definition and Quiz

1. Define - Define the term Portfolio Specific Risk.
2. Context - Use Portfolio Specific Risk in a sentence.
3. Quiz - Test yourself.

by Paul Alan Davis, CFA

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Understanding Portfolio Specific Risk and Systematic Risk

Intermediate

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.

• Total Portfolio Variance = (Beta^2 * Benchmark Variance) + Standard Error^2

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.

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Quiz

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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

Our trained humans found other terms in the category portfolio risk you may find helpful.

• Portfolio Risk
• Portfolio Variance

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