Explain What is the role of diversification in reducing portfolio risk, andhow does it relate to the concept of unsystematic andsystematic risk? Explain why a diversified portfolio canmitigate specific risks but may still be exposed to market-wide risks.

Explanation of Unsystematic Risk:Unsystematic risk, also known as specific or diversifiable risk, is…

Answered: What is the role of diversification in…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 8QTD

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Similar questions

What does it mean that portfolio diversification can reduce risk, and how does the efficient frontier logically fit into this discussion? include correlation, asset allocation, and asset classes or benchmarks in your answer.
The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?
How does the creation of a portfolio reduce risk? What type of assets should be included in a diverse portfolio? Why should they be included?
Clearly explain why some risks are systematic and others non-systematic. How is it possible for an investor to control the level of non-systematic risk in a portfolio but not the level of systematic risk?
How does the diversification of an investor’s portfolio avoid risk?
Question 1: What is the rationale for the positive correlation between risk and expected return? Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?
Critically discuss the effect of diversification on portfolio risk. Is there any limit of diversification?
What is idiosyncratic risk? How does it differ from market risk?
In order to benefit from diversification, the returns on assets in a portfolio must: Answer a. Not be perfectly positively correlated b. Have the same idiosyncratic risks c. Be perfectly positively correlated d. Be perfectly negatively correlated
This question relates to the two types of risk and to diversification. a)What is specific risk? b)What is market risk? c)What is meant by diversification? d)Explain why diversification is a useful tool to manage specific risk but not market risk. Be sure you answer clearly both why diversification can help manages specific risk as well as why it is not useful in managing market risk. e)Approximately how many stocks in a portfolio do you need to be fully diversified?
How does the magnitude of firm-specific risk affect the extent to which an active investor will be willing to depart from an indexed portfolio?
What is meant by excessive portfolio turnover? Which behavioral bias is primarily responsible for this effect, and how does this bias result in this effect? How does excessive portfolio turnover decrease an investors returns?

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What is the role of diversification in reducing portfolio risk, and how does it relate to the concept of unsystematic and systematic risk? Explain why a diversified portfolio can mitigate specific risks but may still be exposed to market- wide risks.