Asked by Marcos Urbina on Jun 05, 2024
Verified
The risks that diversification cannot eliminate are:
A) interest rate risk.
B) risk due to a recession.
C) inflation risk.
D) systematic risk.
E) All of the above
Systematic Risk
The risk inherent to the entire market or an entire market segment, also known as non-diversifiable risk or market risk.
Diversification
Strategy of spreading investments across various financial assets, industries, or other categories to reduce risk.
Inflation Risk
The hazard that the value of assets or income will be eroded as inflation shrinks the value of a country's currency.
- Gain an understanding of the distinctions between systematic and unsystematic risks and their relevance to portfolio theory.
- Discern the foundations of systematic risk and their impact on choosing investments.
- Understand the distinction between diversifiable and non-diversifiable risks.
Verified Answer
AS
Andrew Shabanov-GomezJun 12, 2024
Final Answer :
E
Explanation :
Diversification can reduce or eliminate unsystematic risk, which is specific to individual investments or sectors. However, it cannot eliminate systematic risks that affect the entire market or economy, such as interest rate risk, recession risk, inflation risk, and other broad economic factors. These are risks that all investments face regardless of the diversification level.
Learning Objectives
- Gain an understanding of the distinctions between systematic and unsystematic risks and their relevance to portfolio theory.
- Discern the foundations of systematic risk and their impact on choosing investments.
- Understand the distinction between diversifiable and non-diversifiable risks.