Which of the following types of risk is most likely avoided by forming a diversi

Question

Which of the following types of risk is most likely avoided by forming a diversified portfolio? A Total risk B Systematic risk C Idiosyncratic (non-systematic) risk Which of the following events is most likely an example of non-systematic risk? A A decline in interest rates B The resignation of chef executive officer C An increase in the value of the U.S. dollar Portfolio managers, who are trying to maximize risk-adjusted returns, will seek to invest less in securities with A Lower values for non-systematic variance B Values of non-systematic variance equal to0 C Higher values for non-systematic variance

Explanation / Answer

Systematic risk is the risk dependent on macroeconomic factors and hence cannot be eliminated by diversifying the portfolio whereas non-systematic risk is the company or industry specific risk which can be eliminated by diversifying the portfolio.

1. C. Non systematic risk

2. As mentioned above, no-systematic risk is company specific risk, hence, B. The resignation of chief executive officer.

3. Risk-adjusted return is return measured by the risk that is involved in producing that return. Hence, B. Values of non-systematic variance equal to 0, will be avoided by given type of portfolio managers.

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