Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Question

Want to see more full solutions like this?

Answer 1

Textbook Question

Chapter 11, Problem 1CQ

Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Expert Solution & Answer

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

National Bank currently has $500 million in transaction deposits on its balance sheet. The current reserve requirement is 10 percent, but the Federal Reserve is decreasing this requirement to 8 percent. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts all excess reserves to loans, but borrowers return only 50 percent of these funds to National Bank as transaction deposits. Show the balance sheet of the Federal Reserve and National Bank if National Bank converts 75 percent of its excess reserves to loans and borrowers return 60 percent of these funds to National Bank as transaction deposits.

The FOMC has instructed the FRBNY Trading Desk to purchase $500 million in U.S. Treasury securities. The Federal Reserve has currently set the reserve requirement at 5 percent of transaction deposits. Assume U.S. banks withdraw all excess reserves and give out loans. What is the full effect of this purchase on bank deposits and the money supply if borrowers return only 95 percent of these funds to their banks in the form of transaction deposits?

Don't used Ai solution

Answer 2

Textbook Question

Chapter 11, Problem 1CQ

Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Expert Solution & Answer

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Textbook Question

Chapter 11, Problem 1CQ

Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Expert Solution & Answer

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Textbook Question

Chapter 11, Problem 1CQ

Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Expert Solution & Answer

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

Expert Solution & Answer

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Answer 8

Expert Solution & Answer

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Summary Introduction

Systematic risk is essential for the complete market or segment. It is otherwise called market risk or undiversifiable risk that has an overall impact. This risk is unavoidable and not predictable. Here, hedging and appropriate strategy of asset allocation works out. While, mitigation with diversification is not possible.

Systematic risk states how one investment supports to the total aggregate risk of business’s financial funding.

Unsystematic risk is otherwise called the diversifiable, residual, non-systematic or specific risk. The proportion of a corporation’s total or aggregate risk which can be reduced through diversified asset portfolio.

Answer 12

Explanation of Solution

The investor can control risks using the following ways:

Yes, investors can control unsystematic risks. However, they cannot control systematic or market risks.

Diversifiable risks are unsystematic risks. Here, the total aggregate risk is decreased while using diversified asset portfolio. For example, oil spill and product liability of one manufacturer (in specific) can be reduced through diversification.

Systematic risks are non-avoidable and not diversifiable. They can be mitigated using diversification. These risks are unavoidable as it applies to complete segment. For example, Supreme Court decision (market related) and rise in interest rate is not avoidable. Also, this risk cannot be diversified.

Answer 13

Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQ Ch. 11 - Prob. 9CQ Ch. 11 - Prob. 10CQ

Diversifiable and Nondiversifiable Risks In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Concept explainers

Videos

Explanation of Solution

Want to see more full solutions like this?

Chapter 11 Solutions