Question

The goal of diversification is to eliminate: Group of answer choices all investment risk. the effects...

The goal of diversification is to eliminate:

Group of answer choices

all investment risk.

the effects of beta.

Firm-specific risk.

the market risk premium.

systematic risk.

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Answer #1

The correct answer is Firm-specific risk

Diversification benefit - We should not invest our wealth in a single stock. We should invest in a portfolio. Whenever we combine two or more assets in a portfolio the risk gets reduced

Diversification can reduce the Firm-specific risk. It is also known as Unsystematic risk.

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.

Thus the goal of diversification is to eliminate Firm-specific risk.

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