Diversification allows savers to largely eliminate:
A) risk aversion.
B) idiosyncratic risk.
C) systematic risk.
D) risk premiums.

Question

Quizplus · Accepted Answer

Diversification allows savers to spread their investments across multiple assets, which can largely eliminate idiosyncratic risk (also known as unsystematic risk) that is specific to individual assets or companies. However, systematic risk (also known as market risk) cannot be eliminated through diversification as it affects the overall market and is beyond the control of individual investors. Risk aversion refers to an individual's preference for less risk over more risk, and risk premiums are the additional returns that investors demand in exchange for taking on additional risk, so neither of these options are eliminated through diversification.

Diversification Allows Savers to Largely Eliminate