What is the difference between unique risk, which can be diversified away, and market risk, which cannot?

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What is the difference between unique risk, which can be diversified away, and market risk, which cannot?




Answer: Even if you hold a well-diversified portfolio, you will not eliminate all risk. You will still be exposed to macroeconomic changes that affect most stocks and the overall stock market. This means that stock returns are positively correlated. These macro risks combine to create market risk - that is, the risk that the market as a whole will slump.
Stocks are not all equally risky. But what do we mean by a "high risk" stock? We don't mean a stock that is risky if held in isolation; we mean a stock that makes an above average contribution to the risk of a diversified portfolio. In other words, investors don't need to worry much about the risk that they can diversify away; they do need to worry about risk that can't be diversified. This depends on the stock's sensitivity to macroeconomic conditions.

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