Idiosyncratic risk.

In plain English

Idiosyncratic risk is the portion of an asset's price movement that its market exposure does not explain, produced by circumstances belonging to that one issuer. In practice it is measured as what is left over after a model accounts for market movement, which is why it shows up as the unexplained residual in a regression. R-squared reports how much of a holding's movement the market explains, so the remainder is the idiosyncratic share. A concentrated position, an employee's stock in their own employer, or a single rental property all carry heavy idiosyncratic risk. Spreading across unrelated assets is the standard way it is reduced.

01Why it matters

Someone whose paycheck, stock grants, and savings all depend on one employer is holding a single idiosyncratic risk three times over.

02The math, step by step

A stock has an R-squared of 0.35 against a broad index. That means about 35 percent of its price movement lines up with the market and roughly 65 percent comes from its own situation. Two such stocks in unrelated industries draw most of their risk from separate sources, so combining them cancels a good share of it.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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