Asked by Ahmed Dabour on Jun 24, 2024
Verified
According to portfolio theory, the most relevant risk for any widely traded individual security is its:
A) unsystematic risk.
B) standard deviation.
C) covariance risk.
D) systematic risk.
Unsystematic Risk
The risk associated with a specific company or industry, which can be mitigated through diversification, unlike systematic risk.
Covariance Risk
The degree to which two assets' returns move in relation to each other, indicating the risk inherent in holding the assets together in a portfolio.
Systematic Risk
The risk inherent to the entire market or market segment, often referred to as market risk, which cannot be eliminated through diversification.
- Understand the concept of systematic and unsystematic risk and their significance in portfolio theory.
Verified Answer
SK
Shubham KumarJun 29, 2024
Final Answer :
D
Explanation :
Portfolio theory suggests that the most relevant risk for an individual security is its systematic risk, which is the risk associated with the entire market or a particular sector. Unsystematic risk can be diversified away by holding a well-diversified portfolio. Standard deviation is a measure of total risk, not just systematic risk. Covariance risk is not a commonly used term in finance.
Learning Objectives
- Understand the concept of systematic and unsystematic risk and their significance in portfolio theory.