Which of the following statements is/are correct?
I. Unsystematic risk can be eliminated through diversification.
II. Unsystematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms, like inflation, political events, etc.
A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question

Quizplus · Accepted Answer

Statement I is correct as unsystematic risk can be eliminated through diversification by investing in a portfolio of assets with different and uncorrelated risk sources. Statement II is incorrect as unsystematic risk is the risk specific to a particular asset or firm that can be reduced through diversification. The relevant portion of an asset's risk attributable to market factors affecting all firms is systematic risk.

Which of the Following Statements Is/are Correct