CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
As an investor adds more securities with imperfectly correlated returns to a portfolio, the risk that is most likely to remain after extensive diversification is:
Systematic risk remains after extensive diversification. Company-specific, or unsystematic, risk is reduced as idiosyncratic movements offset one another, but market-wide factors affect all securities together, so their risk cannot be eliminated by holding more assets.
- ASystematic riskCorrect
- BUnsystematic risk
- CCompany-specific risk
Explanation
Diversification averages out company-specific (unsystematic) risk because idiosyncratic returns are not perfectly correlated. Market-wide systematic risk affects all securities and cannot be diversified away, so it remains.
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