Question

In broad terms, why are some risks diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Answer 1

Systematic risk is considered to be a risk which effects the entire market or market segment. This type of risk is undiversifiable risk as it would affect entire market and not just s particular industry or a stock

This type of risk is completely unpredictable and it cannot be avoided.

Unsystematic risk is considered to be a risk which affects a particular stock or industry instead of whole market. This type of risk is diversifiable risk.

In such case investor can control the level of unsystematic risk in a portfolio by easily investing in other stock or industry which is risk free investors can easily diversify there risk by investing in different stocks or securities which is not possible in case of systematic risk as this risk affects the whole market or market segment so no diversification can reduce risk

So above statement is true that investor can control the level of unsystematic risk in a portfolio , but not the level of systematic risk.

Some risk are diversifiable because the risk would be associated with a single stock or securities or may be to one industry so one can diversify its risk by investing in other stock or securities which is risk free so in such case the risk is diversifiable

And in some risk are non diversifiable as such risk would have affected the whole market and no diversification would reduce the risk.