Question

Unsystematic risk is useful because it: A: can be used to standardize the Alpha B: measures...

Unsystematic risk is useful because it:

A: can be used to standardize the Alpha

B: measures the gain/loss attributable to good/poor management

C: identifies the non-market risk factors

D:can be used to refine the response to changes in the economy

E: provides a range of additional probable outcomes

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Answer #1

Unsystematic risk is useful because it identifies the non-market risk factors

Explanation - Total risk is the sum of systematic and Unsystematic risk. The systematic risk or market risk cannot be avoided as it is due to the market whereas unsystematic risk or diversifiable risk is inherent to a particular firm, hence it is also known as firm-specific risk. It tells about the non-market risk factors and can be eliminated by diversification.

Total risk = Market risk (systematic risk) + Firm-specific risk (Unsystematic risk)

C is the correct option

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