Question
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What are the main types of risk and to what extent candiversification reduce risks associated...
What are the main types of risk and to what extent can diversification reduce risks associated with stock portfolios?
Solutions
Expert Solution
There are two main types of risk:
- Systematic risk
- Unsystematic risk
The systematic risk is also called the market risk. This risk affects all the businesses in the market and as such this risk cannot be diversified by holding many uncorrelated stocks.
The examples of systematic risk include change in interest rates, change in corporate tax policy by the government, global pandemic etc.
The Unsystematic risk is also called the firm-specific risk. This risk affects only a particular firm. The unsystematic risk can be diversified by holding many uncorrelated stocks in the portfolio.
The examples of unsystematic risk include sudden resignation of the CEO, whistleblowing by an employee against the top management etc
jeff jeffy answered 2 years agoRelated Solutions
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