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CMA Intermediate · Financial Management and Business Data Analytics · Risk and Return

Which statement about risk in the context of a diversified portfolio is correct?

Unsystematic risk can be reduced by diversification, while systematic risk remains. Company-specific risks offset each other across many securities, but market-wide factors like inflation or interest-rate changes affect all securities and stay in the portfolio regardless of how many are held.

  1. ASystematic risk can be eliminated by holding a large number of securities
  2. BUnsystematic risk is market-wide and affects all securities equally
  3. CUnsystematic risk can be reduced by diversification, while systematic risk remainsCorrect
  4. DStandard deviation measures only systematic risk

Explanation

Unsystematic (company-specific) risk is diversifiable and falls as securities are added. Systematic (market) risk, such as interest-rate or inflation changes, affects all securities and cannot be diversified away. Standard deviation measures total risk, not only systematic risk.

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