Final answer:
Unsystematic risk, also known as unique risk or asset-specific risk, affects a small number of assets and can be mitigated through diversification. It is crucial for investment analysis and does not impact the entire economy.
Step-by-step explanation:
Unsystematic risk, identified by the following statements, is a key concept in financial markets and investment decision-making:
- It is also called unique risk.
- It is also referred to as asset-specific risk.
- It affects a small number of assets.
- It does not affect a large part of the economy, which is instead a characteristic of systematic risk.
Unsystematic risk pertains to the risk associated with a specific company or sector and can be mitigated through diversification. Understanding unsystematic risk is important for investors as they analyze different types of financial assets and make portfolio decisions. Assessing prospective investments involves considering three factors: the expected rate of return, the risk (including unsystematic risk) that the return will significantly deviate from expectations, and the investment's liquidity. High levels of unsystematic risk may result in substantial variances between expected and actual rates of return, as was evident from investment challenges during the Great Recession due to failures in certain financial assets like collateralized mortgage obligations and credit default swaps.