Final answer:
Unsystematic risk is the portion of total risk attributable to firm or industry factors that can be reduced through diversification. It is firm-specific and not related to the overall market movements. The correct answer is b) Unsystematic risk.
Step-by-step explanation:
The portion of total risk that can be eliminated through diversification is known as unsystematic risk. It is also referred to as diversifiable risk or idiosyncratic risk. Essentially, unsystematic risk is specific to a particular company or industry. For instance, if a pharmaceutical firm loses a pivotal lawsuit, it would impact that firm's stock but unlikely the entire market. Diversification, such as investing in a variety of sectors, can reduce this kind of risk because the negative performance of one investment can be balanced by the positive performance of others.
In contrast, systematic risk, also known as market risk or non-diversifiable risk, affects the overall market and cannot be reduced through diversification. Examples include interest rate changes, inflation, and recessions. The correct answer to the student's question is b) Unsystematic risk.