Question

Unsystematic risk ________. A) does not change B) can be eliminated through diversification C) cannot be estimated D) affects all firms in a market

Answer 1

Unsystematic risk can be mitigated by diversification, as it affects specific companies or industries and not the market as a whole. By holding a mix of different investments, the impact of unsystematic risks on a portfolio can be reduced.

Step-by-step explanation:

Unsystematic risk is specific to a particular company or industry and can be reduced through diversification. When investors hold a variety of assets, they can minimize the impact of risks that affect one particular company or sector, as other investments in the portfolio may not be influenced by the same factors. Diversifying a portfolio mixes different types of investments within a portfolio, which can reduce the unsystematic risk because different assets will likely not respond in the same way to adverse events. As it relates to the provided options, the correct statement regarding unsystematic risk is that it can be eliminated through diversification.

Answer 2

The correct answer is option B : Unsystematic Risk, can be eliminated through diversification.

Unsystematic Risk, also known as specific risk, refers to the risk that is unique to a particular company or industry and can be eliminated or reduced through diversification.

Diversification involves investing in a variety of different assets or securities to reduce the impact of any one investment on the overall portfolio.

By spreading investments across different companies or industries, unsystematic risk can be mitigated, as the negative impact of any one investment is offset by the positive performance of others.