Recommendations & StrategiesQuestion 45 of 110
Diversification within a portfolio is primarily intended to reduce which type of risk?
a.Unsystematic (company-specific) risk
b.Systematic (market) risk
c.Interest rate risk on all bonds
d.Purchasing power risk
Explanation
Diversification spreads investments across many securities and sectors to reduce unsystematic risk, which is specific to individual companies or industries. Systematic or market risk affects the entire market and cannot be diversified away. This distinction is fundamental to portfolio construction.
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