Because investors can eliminate unsystematic risk "for free" by diversifying their portfolios, they ________.
A) do not require a risk premium for bearing it
B) require a risk premium for bearing it
C) are indifferent about credit spread and risk premium
D) do not require a credit spread

Question

Quizplus · Accepted Answer

Unsystematic risks are firm-specific risks that can be diversified away by investing in a portfolio of stocks. Since investors can eliminate unsystematic risk by diversifying their portfolios, they do not require a risk premium for bearing it. In other words, investors should be compensated only for the systematic risk (beta), which cannot be eliminated by diversification, and not for the unsystematic risk.

Because Investors Can Eliminate Unsystematic Risk "For Free" by Diversifying