Unsystematic risk refers to risks that affect which?

Unsystematic risk refers to risks that affect which?

• A. A specific company or industry and can be diversified away
• B. The entire market and cannot be diversified away
• C. Interest rate movements across the yield curve
• D. Global macroeconomic trends

Answer: (A)

Unsystematic risk is the risk tied to a specific company or industry. It arises from factors like a company’s management decisions, product issues, or industry changes, which don’t affect every investment. Because these risks are unique to a single company or industry, they can be reduced or eliminated by holding a diversified mix of investments. That’s why this concept is described as affecting a specific company or industry and being diversifiable. In contrast, risks that impact the whole market—such as broad market movements, macroeconomic shifts, or changes in interest rates across the yield curve—are systematic (market) risks. These cannot be eliminated simply by diversification because they affect many assets at once. Global macro trends similarly influence a wide range of investments, not just one company or industry.

Unsystematic risk is the risk tied to a specific company or industry. It arises from factors like a company’s management decisions, product issues, or industry changes, which don’t affect every investment. Because these risks are unique to a single company or industry, they can be reduced or eliminated by holding a diversified mix of investments. That’s why this concept is described as affecting a specific company or industry and being diversifiable.

In contrast, risks that impact the whole market—such as broad market movements, macroeconomic shifts, or changes in interest rates across the yield curve—are systematic (market) risks. These cannot be eliminated simply by diversification because they affect many assets at once. Global macro trends similarly influence a wide range of investments, not just one company or industry.