Which of the following types of risk can be reduced through diversification? Choose the best answer.
I. Stand-alone risk -
II. Unsystematic risk -
III. Systematic risk -
IV. Market risk -
V. Beta risk -
VI. Diversifiable risk -
Click on the arrows to vote for the correct answer
A. B. C. D. E.D
Of the risks listed, only unsystematic and stand-alone risk are diversifiable. Unsystematic risk is also referred to as "diversifiable risk," therefore answer VI is correct. Stand-alone risk is defined as the variability of an asset's expected returns if it were the only asset of a firm and the stock of that firm is the only security in an investor's portfolio. This type of risk is definitively reduced through diversification, and is commonly referred to as "unsystematic risk." Systematic risk measures that part of an assets risk that is inherent regardless of the level of diversification, and is measured by the Beta coefficient. Systematic risk is also referred to as
"market risk" and "beta risk." Corporate risk is defined as the variability of an asset's expected returns without taking into consideration the effects of shareholder diversification. This is one step away from Stand-alone Risk, which measures the risk of an asset not only without taking into consideration the effect of shareholder diversification, but of company diversification as well. Stand-alone risk assumes that the asset in question is the only asset of the firm and that the securities of the firm are the only asset in investors' portfolios. Corporate risk takes into consideration that firms will diversify their asset bases.