Question

9.   “In general, the larger a portfolio (in terms of number of assets) the lower its non-systematic risk.”
a.   Define systematic risk and non-systematic risk, and briefly explain their difference.                                  
b.   Do you agree or disagree with the above statement? Justify your answer.                                            

Answer 1

(a) systematic risk is a risk of entire Market falling or crashing not just 1 or 2 particular Stock. Whereas non-systematic risk is the risk which is inherent in a Particular stock not the entire market. The Major difference between systematic risk and non-systematic risk is that the systematic risk cannot be diversified and it cannot be avoided even when you invest in too many number of stocks as they all will fall when the market will fall But non-systematic risk can be diversified by Investing in different number of stocks i.e. Through Diversification.

(b) Agree to the Statement because non-systematic risk is the risk which is inherent in a Particular stock not the entire market. Hence as you invest more in different stocks the inherent risk of a particular stock decreases and Hence as we create a larger portfolio  (in terms of number of assets), The non-systematic risk lowers.