Question

if you build a large enough portfolio, you can diversify away all ________ risk, but you will be left with ________ risk.

A) diversifiable, unsystematic

B) unsystematic, systematic

C) systematic, undiversifiable

D) undiversifiable, diversifiable

Answer 1

Unsystematic risk refers to diversifiable risk that pertains to a particular firm. This risk is reduced by investing in a diversified portfolio.

Systematic risk is the risk affecting the whole market. Thereby, it cannot be reduced by diversification. It is caused by forces external to a firm.

If you build a large enough portfolio, you can diversify away all unsystematic risk, but you will be left with systematic risk.

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