Risk specific to one asset or firm. It diversifies away in a large portfolio, so it earns no premium.
Where you will meet it
Idiosyncratic risk comes up in 9 learning outcome notes across the FRM syllabus.
A few of them:
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Idiosyncratic risk can be diversified away and earns no premium.”
Measuring Credit Risk FRM Part I · Valuation and risk models
“The portfolio is large enough that idiosyncratic risk diversifies away, so given the factor the default rate is fixed.”
Credit Scoring and Retail Credit Risk Management FRM Part II · Credit risk measurement and management
“It shrinks as N grows, so idiosyncratic risk diversifies away and retail losses are driven mainly by systematic factors such as unemployment and house prices.”
Factor Theory FRM Part II · Risk management and investment management
“Idiosyncratic risk earns no premium, because it diversifies away.”
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