An investor wants to invest in the oil industry but does not know which major companies will produce the greatest return. As a result, the investor buys shares in several oil companies. By
Buying several companies to reduce risk, the investor is seeking to reduce

Question

Quizplus · Accepted Answer

By buying shares in multiple oil companies, the investor is seeking to reduce idiosyncratic risk, which is the risk specific to a particular company or industry. By diversifying their investment, the investor is spreading out their risk among different companies, which can reduce the impact of negative events affecting any one company. Systemic risk and nondiversifiable risk cannot be reduced through diversification. The risk premium is a measure of the return investors require to invest in a risky asset compared to a risk-free asset, and is not directly related to diversification.

An Investor Wants to Invest in the Oil Industry but Does