In broad terms, why are some risks diversifiable? Why are some risks non-diversifiable? Does it follow...

In broad terms, why are some risks diversifiable? Why are some risks non-diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? Substantiate your answer with real world examples.

Expert Solution

Some risk are diversifiable and some are not. Risk which is diversifiable is in our controls eg Management conflict, labour issue and which is not diversifiable are Interest rate risk which has to face by every industy.
Investor can only control the UnSystematic risk not the Sytematic risk, this statement is True

Undiversifable risk - It is a risk refers to market risk, or market segment risk. This risk cannot be eliiminated by diversification, this is also called a systematic risk.
Examples are - Chnage in interest rate, natural disaster , economic recession.
All companies are effected by these whether a comapny has good financial or not.

Unsystematic Risk - It is a risk refers to a certain industry, uncertainity happen to a particular company, this can be reduced by way of diversification, this is also called a diversifiable risk.
Examples are - Loss due to Labour problems, management issue etc.
This risk can only effect this industry.

jeff jeffy answered 2 years ago

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