NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
Which of the following best describes systematic risk in the context of equity investing?
Systematic risk is market-wide risk driven by factors such as interest rates, inflation and economic cycles. It affects all securities to some degree and cannot be eliminated by diversification, unlike company-specific unsystematic risk.
- ARisk that can be eliminated fully by holding a diversified portfolio
- BRisk arising from market-wide factors that affects all securities to some extentCorrect
- CRisk specific to the management quality of a single company
- DRisk arising only from a firm's use of debt financing
Explanation
Systematic (market) risk stems from economy-wide factors such as interest rates, inflation and recessions, and it cannot be removed through diversification. Company-specific management or financing issues are unsystematic risks, which diversification can reduce.
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