SIE practice questioneasyUnsystematic Risk — Diversification
Unsystematic risk can be reduced by:
- ATiming the market to buy at the lowest price
- BDiversifying across many different securities and asset classes✓ Correct answer
- CInvesting all funds in a single high-performing stock
- DOnly investing in government bonds
Explanation
Why B — Diversifying across many different securities and asset classes
Unsystematic (company-specific or diversifiable) risk is reduced through diversification — spreading investments across different companies, industries, sectors, and asset classes. This way, a negative event affecting one holding is offset by others. Concentrating in a single stock (A) increases unsystematic risk. Note: diversification reduces unsystematic risk but CANNOT eliminate systematic (market) risk.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 1,867+ SIE questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Investment Companies & Packaged Products questions
- Political risk is BEST described as:
- Which of the following is an example of systematic (market) risk?
- All of the following are types of systematic risk EXCEPT:
- If an ETF's market price exceeds its intraday NAV (iNAV), the ETF is trading at:
- Which portfolio is MOST effectively diversified to reduce unsystematic risk?
- A 2x leveraged ETF seeks to provide:
- Which of the following best describes the net asset value (NAV) of an open-end mutual fund?
- Which of the following is an advantage ETFs have over traditional open-end mutual funds?