In: Finance
The risk of a completely diversified portfolio ______________. Group of answer choices
can be regarded as the variance of the market portfolio
has only unsystematic risk and no systematic risk
has only systematic risk and no unsystematic risk
can be regarded as the standard deviation of the market portfolio
The correct answer is has only systematic risk and no unsystematic risk
There are two types of Risk
Systematic Risk - It is the volatility of a stock on account of economy wide factors. It affects all stocks in the same direction with unequal sensitivity. It is the risk which is inherent to the market and it cannot be avoided through diversification.
Unsystematic Risk - It is the volatility of a stock on account of internal company specific factors. This risk can be avoided through diversification. The greater the number of stocks in the portfolio the greater is the chance of Unsystematic Risk getting cancelled out. The Unsystematic risk can be eliminated by holding a completely diversified portfolio.
Investors are exposed to a variety of risks when investing in securities. Some of the risks are associated with economic events that can be linked to risk and return. Systematic Risk or Market risk that the investors cannot eliminate even in a completely diversified portfolio.