Question

Which form of risk cannot be diversified away?

If systematic risk did not exist, would firm-specific be considered the same as total risk? Why?

Answer 1

Let us know the two types of risk .

Systematic risk - Syatematic risk is the risk that exists for any stock this is an unavoidable risk. Hence this type of risk cannot be avoided through diversification

Examples of systematic risk include Inflation, Currency fluctuations , Market sentiments etc

Unsystematic Risk - Unsystematic risk is a specific risk it is unique depending on the entity or the industry .

Unsystematic risk can be diversified by investing in a variety of stocks .

Examples of Unsystematic risk include bad corporate governance, Unearthing fruads, Major loss due to catastrophe etc

Total Risk is always equal to systematic and unsystematic risk

Hence when there is no systematic risk the firm specific risk itself is the total risk.

Note - Generally systematic risk is unavoidable