Skip to content

NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Introduction to Securities Markets

A stock index fund tracking the Nifty 50 holds a portfolio whose price movements mirror the index. Which type of risk can such a fund NOT remove through its diversification across the 50 stocks?

Systematic or market risk cannot be removed by diversification. It arises from economy-wide factors such as interest rates, inflation and growth that affect all securities. Company-specific or unsystematic risk can be reduced by holding many stocks, as an index fund does.

  1. ACompany-specific risk of a single stock
  2. BSystematic (market) riskCorrect
  3. CConcentration risk in one issuer
  4. DUnsystematic risk of a particular sector firm

Explanation

Diversification reduces unsystematic (company or sector specific) risk. Systematic or market risk affects all securities, arising from factors like interest rates, inflation and economic conditions, so it cannot be diversified away. The other options are all forms of specific risk that diversification reduces.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Securities Markets shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Securities MarketsFree diagnostic mock

More Introduction to Securities Markets questions