Question

1.What is meant by diversification, and how does it relate to common versus independent risk? (Please be meticulous and specific).

2.What is the difference between systematic and unsystematic risk?

Answer 1

1. Diversification means having stocks of different sectors in a portfolio thus your risk is spread out over various sectors . So if one stock isn't performing than other stock might be performing which neagtes the losses.

Beta is related to independent risk and not common risk . Common risk refers to risk to all stocks . Diversification helps in reducing independent risk . As some loss in one stock can be cope up with gains in other stock

2. Systematic risk is defined as risk associated to entire market . It is also known as market risk.

Unsystematic risk is related to specific stock. It's also known as diversifiable risk as it can be diversified by the diversification process.