Question

How can I calculate the unsystematic risk of an individual stock?

Answer 1

Total Risk / Variance = Systematic Risk + Unsystematic risk

or, Variance = ?² x ?_m² + unsystematic risk

or, Unsystematic risk = Variance - (?² x ?_m² )

where, ? is the beta of the stock and ?_m² is the variance of market.

Variance of a stock can be computed as follows depending upon the type of data -

Ex-ante data (past data)

where, n is the no. of returns in the data set

post-ante data (Future data)