Products & Their RisksQuestion 173 of 398
Even a well-diversified stock portfolio still carries which type of risk?
a.Unsystematic risk only
b.Company-specific risk from a single firm
c.Systematic (market) risk that affects the entire market
d.No risk at all
Explanation
Diversification reduces or removes unsystematic (company-specific) risk, but it cannot eliminate systematic risk, which stems from market-wide forces such as recessions or interest rate changes. Therefore, even a broadly diversified portfolio remains exposed to systematic risk. This is why diversification lowers, but never fully removes, total portfolio risk.
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