Question

Diversifiable and non-diversifiable risk are the core concepts in this chapter. From theft and earthquake insurance examples, we learned why we can readily reduce individual specific risk while common risks do not. To check your understanding, could you find an actual example relevant to two different types of risk, and how you can (or cannot) diversify those two?

Answer 1

Diversifiable risk

This is an unsystematic risk which is specific to a company. This includes dramatic events like strike, natural disasters and simple as slumping sales etc.The price change due to the unique features of a particular security can be considered in this risk.

Example: ABC company faces financial losses due to the recall of a it's product. Here the market is not decline the specific security issuer faces loss due to the unique features of the product

Non-diversifiable risk

These are systematic and market risk which can't mitigate by adding that asset to a diversified investment. This is common to the entire class of assets and liabilities.

Example: War, inflation and international events. These factores affect