“By investing in diversified portfolio of stocks in different industries or sectors, you can remove all...

“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.

Solutions

Expert Solution

Risk can be broadly classified into below 2 types:

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.
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.

Please do rate me and mention doubts, if any, in the comments section.

jeff jeffy answered 1 year ago

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