NISM Certifications · NISM-Series-XV: Research Analyst · Fundamentals of Risk and Return
Which statement about systematic and unsystematic risk is correct?
Unsystematic, company-specific risk can be reduced through diversification, while systematic, market-wide risk cannot be eliminated this way. Beta measures systematic risk, and it affects the whole market rather than a single company.
- AUnsystematic risk can be reduced by diversification, whereas systematic risk cannot be eliminated by itCorrect
- BSystematic risk can be removed by holding many stocks of one sector
- CUnsystematic risk is measured by beta
- DSystematic risk affects only one company
Explanation
Company-specific (unsystematic) risk is diversified away across many holdings, while market-wide (systematic) risk remains and is measured by beta. Holding stocks of a single sector does not remove sector-wide risk.
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