ECONOMICS (CBSE/UGC NET)

ECONOMICS

RISK AND RETURN

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

Which of the following risks can an investor reduce or eliminate through diversification or by adding more securities of other companies to the investment portfolio?

A	Market risk
B	Political risk
C	Interest rate risk
D	Financial risk

Explanation:

Detailed explanation-1: -In general, diversification aims to reduce unsystematic risk. These are the risks specific to an investment that are unique to that holding.

Detailed explanation-2: -Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk. Once diversified, investors are still subject to market-wide systematic risk. Total risk is unsystematic risk plus systematic risk.

Detailed explanation-3: -Portfolio diversification is the process of selecting a variety of investments within each asset class, which can help those looking for how to minimize their investment risk. Diversification across asset classes may also help lessen the impact of major market swings on your portfolio.

Detailed explanation-4: -Firm specific risk, also known as idiosyncratic risk or unsystematic risk, is the only risk that can been diversified away by adding securities to a portfolio.

Detailed explanation-5: -15. Unsystematic risk is the risk that cannot be eliminated through diversification. 16. The market portfolio is a portfolio that contains all risky assets.

There is 1 question to complete.