Question

comment on one area of risk, and discuss methods To manage it

Answer 1

One area of risk in investing in equities is the unsystematic risk. Unsystematic risk is the risk associated with a single stock as opposed to the whole market. Some of the examples of unsystematic risk include the unexpected resignation of a key executive, a new competitor entering the market, a sudden increase in the price of key raw materials of a product, etc.

The unsystematic risk can be minimized or nullified by holding a portfolio of stocks, which have a relatively low correlation between the returns of the stocks. Typically, a portfolio of 30 stocks would be sufficient to nullify the unsystematic risk. Instead of buying 30 stocks, one can buy an ETF that tracks the market. This is an efficient form of diversification.

Can you please upvote? Thank You :-)