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Which one of the following conditions can be effectively eliminated through portfolio diversification?

A) Systematic risk
B) Unsystematic risk
C) Market risk
D) Interest rate risk

User Rianjs
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1 Answer

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Final answer:

Unsystematic risk, which affects a specific company or industry, can be eliminated through portfolio diversification. Systematic risk, market risk, and interest rate risk, which affect the entire market, cannot be mitigated solely by diversification.

Step-by-step explanation:

The condition that can be effectively eliminated through portfolio diversification is B) Unsystematic risk. Unsystematic risk refers to the potential for loss that can affect a specific company or industry, such as poor management decisions or product obsolescence.

By diversifying, i.e., buying stocks or bonds from a broad range of companies, an investor spreads their risk across various sectors and assets, thus canceling out extreme fluctuations caused by issues specific to a single company or industry.

On the other hand, systematic risk, market risk, and interest rate risk affect the entire market or large segments of it and cannot be mitigated just by diversification. These risks are inherent to the market as a whole and are influenced by external factors like changes in economic policy, inflation rates, and geopolitical events.

User Roman Patutin
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