Question

In: Finance

Which of the following can be greatly reduced by diversification? a. Unsystematic risk. b. Market risk....

Which of the following can be greatly reduced by diversification?

a. Unsystematic risk.

b. Market risk.

c. Systematic and unsystematic risk.

d. Systematic risk

Solutions

Expert Solution

Option a, firm specific risk is also known as unsystematic risk and it can be reduced through diversification.

Option b, Market risk is also called as undiversifiable risk. It is caused by market factors affecting all firms such as recession, labor strikes etc. it is called as undiversifiable risks since diversification cannot eliminate such risks.

Option c, Systematic and unsystematic risk measure investment risk. They are risks caused by volatility of stock prices.

Option d, systematic risk is the risk affecting the whole market. It is an undiversifiable risk and it is impossible to completely avoid it.

Therefore, the answer is option a.

jeff jeffy answered 2 years ago
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