Final answer:
Unsystematic risk specifically affects an individual firm, and it can be mitigated by diversifying investments. It originates from factors unique to a company or industry and does not impact the market as a whole or all firms within an industry.
Step-by-step explanation:
Unsystematic risk affects a specific firm, rather than the market as a whole or firms across an entire industry. This type of risk, also known as diversifiable risk or idiosyncratic risk, is unique to a particular company or industry. It can arise from various factors such as management decisions, product recalls, or industry-specific economic downturns. Unlike systematic risk, which impacts the entire market and cannot be mitigated through diversification, unsystematic risk can be reduced by diversifying investments across various companies or industries.
For example, if a pharmaceutical company faces a lawsuit over one of its products, that is an unsystematic risk affecting that firm. It would not directly impact other forms of businesses like utility companies or schools. Similarly, a technology firm that loses significant data due to a cyber-attack experiences unsystematic risk, which would not necessarily affect a restaurant chain. Diversification is a key strategy to protect against unsystematic risks, as it spreads out the potential negative impacts across different assets.