Final answer:
Nondiversifiable risk is also known as Systematic Risk, which affects the entire market and cannot be mitigated through diversification. It is important for investors to consider both systematic and unsystematic risks when investing in financial assets.
Step-by-step explanation:
Nondiversifiable risk, which is the subject of your query, is also known as Systematic Risk. Systematic risk refers to the risk inherent to the entire market or market segment. This type of risk is caused by factors that affect all companies, such as economic recessions, political instability, changes in interest rates, and natural disasters. Since these events impact the whole market, this risk cannot be eliminated through diversification. It contrasts with unsystematic risk, which impacts a specific company or industry and can be mitigated through diversification.
When investors consider financial assets, it's essential to consider both systematic and unsystematic risks. Systematic risk, being inherent to the market, requires investors to seek returns that compensate for this unavoidable exposure. On the other hand, unsystematic risk can be reduced by investing in a variety of assets, thereby minimizing the impact of any one company or sector's poor performance.