Final answer:
Diversifiable risks in a market-wide portfolio include competition effects, specific input price changes, and labor strikes. These risks can be mitigated through diversification, which involves spreading investments across various firms to decrease portfolio volatility. However, diversification doesn't protect against systemic market risks.
Step-by-step explanation:
Diversifiable risks are specific risks that can be eliminated through diversification. These include risks such as the effects of competition on the demand for a firm's products, changes in economy-wide prices for specific inputs like coffee, and occurrences like labor strikes. These risks are unique to individual companies or industries, and thus can be mitigated by holding a varied portfolio of stocks, which is a basic financial strategy recommended by investors.
When investing in individual firms, one may encounter specific business risks, or unsystematic risks, that are not related to the market as a whole. For example, a company's poor managerial decisions can affect its stock price independently of the overall stock market performance. Financial investors thus often advise their clients to diversify their portfolios, spreading investment across different sectors to offset the impact of these risks. The concept behind diversification is that while some companies may perform below expectations due to unique risks, others may do better, and the overall effect is to reduce the volatility of the investment.
Nonetheless, diversification does not protect against systemic or market risks, such as those seen during economic recessions or stock market crashes, where most stocks may decline in value together. As seen in 2008, even diversified portfolios can suffer significant losses when the overall market tanks. Thus, diversification is key in managing individual company or industry-related risks, but it does not eliminate market-wide risks.