What type of risk is characterized as undiversifiable?

What type of risk is characterized as undiversifiable?

• A. Market risk
• B. Specific risk
• C. Liquidity risk
• D. Credit risk

Answer: (A)

Market risk is considered undiversifiable because it stems from factors that impact the entire market or economy, such as economic shifts, interest rate changes, or geopolitical events. Unlike specific risk, which is related to individual companies or industries and can be mitigated through diversification, market risk cannot be eliminated through the selection of a diverse portfolio. It affects all stocks and cannot be avoided since it is related to the overall investment environment. Therefore, investors must accept this type of risk and use strategies, such as hedging or asset allocation, to manage its potential impact on their portfolios.

Market risk is considered undiversifiable because it stems from factors that impact the entire market or economy, such as economic shifts, interest rate changes, or geopolitical events. Unlike specific risk, which is related to individual companies or industries and can be mitigated through diversification, market risk cannot be eliminated through the selection of a diverse portfolio. It affects all stocks and cannot be avoided since it is related to the overall investment environment. Therefore, investors must accept this type of risk and use strategies, such as hedging or asset allocation, to manage its potential impact on their portfolios.