The price of a security moves for two families of reasons. Some concern the company alone: a lost contract, a halted plant, a product that sells better than expected. Others concern the whole market at once: a rate that rises, a recession in the air, a fear that reaches every security the same day. The first family is the company-specific risk; the second, the market risk. This distinction is the mechanism behind diversification, mechanically: it says what diversification can do, and what it cannot.
Two risks in a single move
You never see the two separately. On a day the security loses 3%, there is one number; but if the whole market lost 2% that day, part of the drop comes from there — the security followed the market — and the rest, 1%, is its own: something that happened to it alone. The next day, the market is flat and the security gains 4% on a quarterly result: all of it is its own. A move therefore reads in two parts, the first shared by every security and the second shared by none.
What diversification removes, and what it leaves
The company-specific risks of two different companies have no reason to strike the same day: one company’s halted plant says nothing about the other’s lost contract. When you hold several loosely correlated securities, these own moves partly offset each other — one falls while another rises — and their sum weakens as securities are added. That is exactly what the diversification article shows with two baskets.
Market risk, by contrast, is shared by every security: when the market loses 10%, there is no security “next door” gaining 10% to make up for it. Adding securities does not dilute it, because each one carries its share. A very diversified portfolio — an index ETF, for instance — carries little else than that risk. It is what remains once everything else has been removed: the price of being invested, rather than out.
Why a security follows the market more or less
Not every security follows the market with the same amplitude. Some amplify its moves — their sales rise and fall with the economy; others dampen them — their customers buy the same things in good years and bad. This sensitivity is measured on past prices: it describes a habit of the past, not a law, and it can change. Everyfolio does not compute it, and it does not separate, within a position, the market’s part from the company-specific part.
A neutral worked example
Two fictional securities, A and B, which follow the market identically, and a portfolio split equally between them.
- Year 1: the market falls 10%. A loses 14% (the market, −10%, and a disappointment of its own, −4%). B loses 6% (the market, −10%, and good news of its own, +4%). The portfolio: (−14% − 6%) ÷ 2 = −10% — exactly the market.
- Year 2: the market gains 8%. A gains 3% (+8% and −5% of its own); B gains 13% (+8% and +5% of its own). The portfolio: (3% + 13%) ÷ 2 = +8% — the market again.
- In this example, the own parts are chosen to be opposite: they cancel out and only the market remains. In reality they cancel only in part, and the fewer securities there are, the less they cancel; the market part never cancels.
Figure · Company-specific risk and market risk
Fictional exampleThe market, then the company
- Move of the stock
- −0.5%
- Of which the company alone
- +0.5%
The market’s part is the same for every stock that day. The other part depends on the company alone. That is the part that holding several companies partly reduces.
What this changes for your tracking
Prices are not yet shown in the app; they will be at launch.
Everyfolio does not separate the two risks and does not measure a security’s sensitivity to the market. It shows, line by line, the allocation column — each position’s share of the portfolio — hence how much a company-specific risk can cost in total. The two risks themselves are recognized on prices: when everything falls the same day, it is the market; when a single security falls while the others hold, it is a company-specific risk. Neither reading is a judgment, nor a forecast.
Challenge: check my understanding
Four questions wait behind an account: they check what you understood, and the state stays from one visit to the next.
Sources
- Harry Markowitz, “Portfolio Selection”, The Journal of Finance, 1952 — diversification reduces company-specific risk, not the risk shared by all securities.
- William F. Sharpe, “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk”, The Journal of Finance, 1964 — the part of a security’s move that follows the market.
Informative, general content — not personalized advice. For your situation: your institution or an advisor.