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?

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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.

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Students have asked these similar questions

It is now January 1. You plan to make a total of 5 deposits of $500 each, one every 6 months, with the first payment being made today. The bank pays a nominal interest rate of 14% but uses semiannual compounding. You plan to leave the money in the bank for 10 years. Round your answers to the nearest cent. 1. How much will be in your account after 10 years? 2. You must make a payment of $1,280.02 in 10 years. To get the money for this payment, you will make five equal deposits, beginning today and for the following 4 quarters, in a bank that pays a nominal interest rate of 14% with quarterly compounding. How large must each of the five payments be?

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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.

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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.

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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.

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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

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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?

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