{"id":208198,"date":"2025-04-26T08:41:00","date_gmt":"2025-04-26T08:41:00","guid":{"rendered":"https:\/\/learnexams.com\/blog\/?p=208198"},"modified":"2025-04-26T08:41:02","modified_gmt":"2025-04-26T08:41:02","slug":"which-of-the-following-is-true-of-unsystematic-risk","status":"publish","type":"post","link":"https:\/\/www.learnexams.com\/blog\/2025\/04\/26\/which-of-the-following-is-true-of-unsystematic-risk\/","title":{"rendered":"Which of the following is true of unsystematic risk"},"content":{"rendered":"\n

Which of the following is true of unsystematic risk?<\/p>\n\n\n\n

a.) It can be minimized when investment correlations are at zero or even slightly positive.<\/p>\n\n\n\n

b.) It is more tightly linked to the market as a whole than systematic risk.<\/p>\n\n\n\n

c.) It is also known as non-diversifiable risk.<\/p>\n\n\n\n

d.) It is unaffected by the level of diversification within a portfolio.<\/p>\n\n\n\n

The correct answer and explanation is :<\/strong><\/mark><\/p>\n\n\n\n

The correct answer is:
a.) It can be minimized when investment correlations are at zero or even slightly positive.<\/strong><\/p>\n\n\n\n

Explanation:<\/h3>\n\n\n\n

Unsystematic risk, also known as diversifiable risk<\/strong> or specific risk<\/strong>, refers to the risk that is inherent to a particular company or industry. It differs from systematic risk<\/strong>, which affects the entire market. Examples of unsystematic risk include management changes, product recalls, or industry-specific events. Unlike systematic risk, which cannot be eliminated through diversification, unsystematic risk can be reduced or even entirely mitigated by diversifying a portfolio.<\/p>\n\n\n\n

Here\u2019s a detailed breakdown of why option a<\/strong> is correct:<\/p>\n\n\n\n

    \n
  • Diversification<\/strong> is key to minimizing unsystematic risk. When an investor holds a diversified portfolio consisting of assets whose returns are not perfectly correlated, the negative impact of one asset’s poor performance can be offset by another asset’s good performance. This means that if the correlations between the assets in the portfolio are low or even slightly positive (e.g., close to zero), the overall unsystematic risk of the portfolio decreases because the individual risks of the assets cancel each other out to some extent.<\/li>\n<\/ul>\n\n\n\n

    Now, let’s examine why the other options are incorrect:<\/p>\n\n\n\n

      \n
    • Option b<\/strong>: Unsystematic risk is not more tightly linked to the market as a whole than systematic risk. In fact, it is systematic risk<\/strong> that is tied to the entire market, affecting all assets, such as economic recessions, interest rate changes, and political events. Unsystematic risk is specific to individual assets or industries.<\/li>\n\n\n\n
    • Option c<\/strong>: Unsystematic risk is not known as non-diversifiable risk. Non-diversifiable risk is another term for systematic risk<\/strong>, which cannot be mitigated through diversification.<\/li>\n\n\n\n
    • Option d<\/strong>: Unsystematic risk is<\/strong> affected by the level of diversification. The more diversified a portfolio is, the less unsystematic risk it carries. Conversely, systematic risk remains unchanged regardless of diversification.<\/li>\n<\/ul>\n\n\n\n

      In summary, unsystematic risk can be minimized by holding a diversified portfolio with assets that have low or zero correlation to each other.<\/p>\n","protected":false},"excerpt":{"rendered":"

      Which of the following is true of unsystematic risk? a.) It can be minimized when investment correlations are at zero or even slightly positive. b.) It is more tightly linked to the market as a whole than systematic risk. c.) It is also known as non-diversifiable risk. d.) It is unaffected by the level of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[25],"tags":[],"class_list":["post-208198","post","type-post","status-publish","format-standard","hentry","category-exams-certification"],"_links":{"self":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/208198","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/comments?post=208198"}],"version-history":[{"count":0,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/posts\/208198\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/media?parent=208198"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/categories?post=208198"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.learnexams.com\/blog\/wp-json\/wp\/v2\/tags?post=208198"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}