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.
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