Stock prices fluctuate due to two types of news:
- Market-wide news: News that affect all stocks, such as news about the economy
- Company or Industry-specific news
Fluctuations due to market-wide news are systematic risk, fluctuations due to specific news is unsystematic risk.
Systematic risk:
- Market risk
- Common risk
- Non-diversifiable risk
Unsystematic risk:
- Firm-specific risk
- Independent risk
- Diversifiable risk
When many stocks are combined in a large portfolio, the unsystematic risk (firm-specific risks) of each stock will average out and be diversified. The systematic risk, however, will affect all firms and will not be diversified.
