NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investments
Which statement about risk in investments is correct?
Diversification across unrelated securities reduces unsystematic risk. This risk is specific to individual companies or sectors, so losses in one holding are offset by others, whereas market-wide systematic risk remains and is measured by beta.
- ASystematic risk can be removed fully by holding many stocks of one sector
- BUnsystematic risk is market-wide and affects all securities
- CDiversification across unrelated securities reduces unsystematic riskCorrect
- DBeta measures unsystematic risk of a security
Explanation
Unsystematic risk is specific to a company or sector and falls when holdings are spread across unrelated securities. Systematic risk is market-wide and cannot be diversified away. Beta measures systematic risk, not unsystematic risk.
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