Sovi.AI - AI Math Tutor

Scan to solve math questions

QUESTION IMAGE

which of the following is true of unsystematic risk? it is also known a…

Question

which of the following is true of unsystematic risk?
it is also known as non - diversifiable risk.
the correlation among the returns of assets within a portfolio are irrelevant to this type of risk.
its presence commands a return in excess of the risk - free rate.
it can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets.

Explanation:

Brief Explanations
  1. Analyze Option 1: Unsystematic risk is diversifiable, while non - diversifiable risk is systematic risk. So this option is wrong.
  2. Analyze Option 2: The correlation among asset returns in a portfolio is relevant to unsystematic risk because diversification (which relies on low or negative correlations) helps reduce unsystematic risk. So this option is wrong.
  3. Analyze Option 3: Only systematic risk (related to market - wide factors) commands a return in excess of the risk - free rate. Unsystematic risk does not, as it can be diversified away. So this option is wrong.
  4. Analyze Option 4: Unsystematic risk is specific to individual assets or a small group of assets. By including assets with returns that do not have a tight positive relationship (i.e., diversifying), unsystematic risk can be reduced or eliminated. This matches the definition of unsystematic risk.

Answer:

The option "It can be diversified away by relying on the lack of a tight positive relationship among the returns of a set of individual assets." (the last option, assuming the options are presented in the order: first option, second option, third option, fourth option as in the image)