Final answer:
Unsystematic risk pertains to the hazards of investing in a single company and can be mitigated through diversification, such as investing in mutual funds. High risk levels have historically harmed investment portfolios, specifically when investors fail to diversify. Small companies demonstrate the importance of establishing stability before going public to manage investment risk.
Step-by-step explanation:
The risks associated with owning the stock of just one organization is typically referred to as unsystematic risk, also known as idiosyncratic or company-specific risk. It originates from the potential for unfavorable events that affect a single company or a small group of companies, such as poor managerial decisions, competition, or changes in regulatory environments. This is in contrast to systematic risk, which affects a large number of assets and cannot be mitigated by diversification. Throughout history, high risk levels have proven to be detrimental to investment portfolios, especially when investors do not diversify their holdings. An example of diversification would include investing in mutual funds, which spread the risk across various stocks or bonds from a wide range of companies, thereby reducing the impact of negative performance in any single investment.
In the context of managing risk, the case of small companies highlights the significance of getting a company up and running before an IPO to ensure there is enough stability and lower risk to attract investors. Without proper management and a track record, the stock of a new company is often seen as very risky. Furthermore, high liquidity in publicly-held company stocks means that while they can be sold quickly, their value can also fluctuate greatly, resulting in higher investment risk in the short term.