Question

If an investor buys enough stocks, he or she can, through diversification, eliminate most of the market risk and company-specific risk and inherent in owning stocks. (why is false the correct answer?)

True.

False

Answer 1

Answer : False

Explanation : There are generally two types of risk involved when you buys any stock this are termed as systematic risk and unsystematic risk.

Systematicrisk refers to risk of market events or factors which are beyond the control of investors like inflation, currencies fluctuations, movement in interest rates etc. which can't be managed by an individual investor that's why it is termed as undiversifiable risk which means market risk can be controlled or eliminated by diversification whereas unsystematic risk refers to risk of loss within a particular industry or security which can be controlled or managed by diversification of portfolio which Investment in different industries and securities so that in the event of any loss or disruption only particular security gets impact by such happening that why it is called diversifiable risk.

So if an investor buys enough stocks he or she can through diversification can eliminate only company-specific risk and inherent in owning stocks and he cannot eliminate market risk because such risk is beyond its control.