Market Risk Vs Idiosyncratic Risk

Before understanding these 2 risks we need to know what is the regression line and Beta

Beta- According to the Capital Asset Pricing Model, the expected return on the ith asset (any asset in your portfolio) is determined from its beta.

In other words, Beta is the regression slope coefficient when the return on the ith asset is regressed on the return from the market.

Regression — It’s a statistical method used in finance, investing, and other disciplines that attempts to determine the strength and character of the relationship between one dependent variable and a series of other independent variables.

Market Risk — The risk posed by the whole financial market especially the stock market. Market risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets in which he or she is involved. Market risk, also called “systematic risk,” cannot be eliminated through diversification, though it can be hedged against in other ways. Sources of market risk include recessions, political turmoil, changes in interest rates, natural disasters and terrorist attacks. Systematic, or market risk tends to influence the entire market at the same time.

Idiosyncratic Risk — Idiosyncratic risk is a type of investment risk that is endemic to an individual asset (like a particular company’s stock), or a group of assets (like a particular sector’s stocks), or in some cases, a very specific asset class (like collateralized mortgage obligations). Idiosyncratic risk is also referred to as a specific risk or unsystematic risk.

Basically, These are the company’s own risk. For example, Steve Jobs death or the i-flop which was not so successful can become an idiosyncratic risk for Apple.