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

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By buying shares in several oil companies, the investor is seeking to reduce idiosyncratic risk, which is the risk that is specific to an individual company. This is different from systematic risk (A), which is the risk that affects the entire market, and nondiversifiable risk (D), which is the risk that cannot be eliminated through diversification. The risk premium (B) is the return investors require for taking on additional risk, and it is not directly affected by diversification.

An Investor Wants to Invest in the Oil Industry, but Does