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It is a kind of unsystematic firm-specific risk that impacts the price of individual stocks rather than affecting the whole industry or sector in which it operates.
A simple diversifiable risk example would be a labour strike or a regulatory penalty.
It can be unpredictable and can occur at any time due to situations like labour strikes, scams, regulatory penalties, natural disasters (For example - The earthquake in 2011 caused an Asia financial crisis and led Japan to huge economic losses), wars, internal factors and management reshuffle that can result in the loss of market share.
Natural risks can be diversified if the shares are purchased in other countries, and the risks associated with equities can be diversified by buying bonds or commodities.
One of the best methods to lower such risks is to diversify to reduce the unsystematic risks.
It can be of three types-
Business risk where the firm faces challenges internally and externally, but the possibility is specifically related to the firm.
Financial risk management shows how the capital and cash flow are structured across the firm or the strategies it can adopt in solvency or turmoils. For example, if the capital structure is robust and the firm has an optimal level of debt and equity, it can manage many such conditions.
Management risk is difficult to manage in a segment where the change in leadership can have a huge impact, as it always leads to the threat of close associates of the outgoing leaders.
Non-diversifiable risks are controlled through methods like hedging, where securities that are less exposed are selected like a portfolio designed on defensives at lower expected returns.
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