Firm-specific risk refers to the potential for a company's stock price to fluctuate due to events or factors that are unique to that company. This type of risk is independent of the overall market movements and can arise from various internal factors, such as management decisions, product recalls, regulatory changes, or competitive pressures. Understanding firm-specific risk is crucial for investors when analyzing the potential performance of a stock within financial markets, as it highlights the need for diversification to mitigate exposure to individual company risks.
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