Question

“By investing in diversified portfolio of stocks in different industries or sectors, you can remove all the risks associated with a stock” - Do you agree with statement? Explain using your own words.

How do we measure the risk associated with a particular stock? Explain using your own words.

Answer 1

Risk can be broadly classified into below 2 types:

1. Systematic risk - It refers to the risk which is associated with the market or market segment as a whole. This type of risk is caused by external, uncontrollable factors and it affects a large number of securities in the market. This risk cannot be removed by diversification.
2. Unsystematic risk - It refers to the risk associated with a particular security, company or industry. This type of risk is caused by internal, controllable factors and it affects a single company or single sector in the market. This risk can be removed by diversification.

Hence, it is clear that even after diversification, the systematic risk cannot be removed. So, I don't agree with the given statement.

And risk associated with a particular stock can be measured by its standard deviation (). It is a quantity which express by how much the members of a group differ from the mean value for the group.

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