The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face ________ risks and their prices move together.
A) common
B) independent
C) firm-specific
D) unique

Question

Quizplus · Accepted Answer

Common risks are risks that affect multiple stocks in a portfolio, such as economic factors, political events or market trends. By holding a diversified portfolio with stocks that have common risks, the portfolio can eliminate some of the risks as these factors will affect stocks differently, thereby reducing the overall portfolio risk. In contrast, firm-specific risks, unique or independent risks are associated with particular stocks and cannot be diversified away by holding a portfolio of stocks.

The Amount of Risk That Is Eliminated in a Portfolio