Increasing the number of securities in a portfolio reduces the unsystematic risk but not the systematic risk.

Question

Quizplus · Accepted Answer

Unsystematic risk, also known as specific risk, is the risk that can be eliminated through diversification by investing in a variety of securities. Adding more securities to a portfolio reduces the unsystematic risk because the risk of any one security is spread out among many. However, systematic risk, also known as market risk or non-diversifiable risk, is the risk that cannot be eliminated through diversification because it is inherent in the overall market or economy. Systematic risk affects all securities in the portfolio and cannot be reduced by adding more securities, only by adjusting the allocation of assets to different asset classes or sectors.

Increasing the Number of Securities in a Portfolio Reduces the Unsystematic