NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Investment
Which of the following risks is most directly reduced by diversifying across many companies in different sectors?
Diversification mainly reduces unsystematic risk, which is specific to a company or sector. Systematic risks such as inflation, interest rate changes and economy-wide policy shifts affect all securities, so spreading investments across stocks does not eliminate them.
- AInflation risk affecting the whole economy
- BUnsystematic risk specific to a company or sectorCorrect
- CMarket-wide risk from an interest rate change
- DRisk from a change in government policy affecting all firms
Explanation
Diversification removes unsystematic (company or industry specific) risk. Inflation, interest rate and policy changes are systematic risks that affect the whole market and cannot be diversified away.
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