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CS Executive · Corporate Accounting and Financial Management · Security Analysis

Which statement about systematic and unsystematic risk is correct?

Unsystematic risk can be reduced through diversification, while systematic risk cannot. Company-specific events tend to offset one another across many securities, but market-wide factors like interest rates and inflation affect all securities. Beta measures sensitivity to this systematic risk, not unsystematic risk.

  1. AUnsystematic risk can be reduced by diversification, whereas systematic risk cannotCorrect
  2. BSystematic risk can be eliminated by holding many securities
  3. CBeta measures the unsystematic risk of a security
  4. DUnsystematic risk arises from changes in interest rates affecting the whole market

Explanation

Unsystematic (company-specific) risk is diversifiable by holding many securities. Systematic (market) risk, such as from interest rate or inflation changes, affects all securities and remains; beta measures it. The other options reverse these ideas.

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