Recommendations & StrategiesQuestion 52 of 100
Diversification across uncorrelated asset classes primarily reduces which type of risk?
a.Systematic (market) risk
b.Interest-rate risk on all bonds
c.Unsystematic (company- or sector-specific) risk
d.Inflation risk entirely
Explanation
Diversification lowers unsystematic risk, the portion of risk unique to a company or sector, by spreading exposure. It cannot eliminate systematic risk that affects the entire market. Combining low-correlation assets improves the risk-return tradeoff.
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