Asked by Herantha Wickramasekera on May 20, 2024
Verified
Because events causing business-specific risks are random, their effects simply cancel out when added together over a substantial number of stocks. This canceling effect enables us to say that business-specific can be "diversified away."
Business-specific Risks
Refers to the uncertainties or potential financial losses that are directly related to the operations and environment of a particular company or industry.
Diversified Away
The reduction of risk in an investment portfolio by allocating investments among various financial instruments, industries, and other categories to minimize the impact of any single asset or risk.
- Acquire knowledge about the contrast between systematic and unsystematic risks and the role of diversification in influencing them.
Verified Answer
SF
sabelle franklinMay 23, 2024
Final Answer :
True
Explanation :
Business-specific risks can be diversified away by investing in a variety of stocks, as the random nature of these risks causes their effects to cancel out when added together over a large number of stocks. This is a fundamental principle of modern portfolio theory.
Learning Objectives
- Acquire knowledge about the contrast between systematic and unsystematic risks and the role of diversification in influencing them.