Response to: Risk is an inherent concept to be considered in every investment. Two major components of risk are systematic risk and unsystematic risk.
Systematic risk is a result of external and uncontrollable factors. These might not be industry or sector or security-specific and it can affect the entire market leading to the fluctuation in prices of all the assets/businesses/securities/investments. On the other hand, Unsystematic risk refers to the risk which emerges out of controlled and known variables that are industry, sector, or security specific.
Systematic risk cannot be eliminated by diversification of portfolio, multi businesses/sectors, whereas the diversification proves helpful in avoiding unsystematic risk.
Examples of risk that might be specific to individual companies or industries are business risk, financing risk, credit risk, product risk, legal risk, liquidity risk, political risk, operational risk, Global factors, etc. Unsystematic risks are considered governable by the Company or industry.
Asset allocation and portfolio allocation are certain protective steps the company is expected to take to cover these risks; Hedging the financial instruments, currency exchange fluctuations, are the steps needed to be taken to avoid financial risks, relevant “Cost pass-thru” clauses, can be incorporated in the contracts which help in passing on the changes in the costs of manufacturing.