Total Portfolio Risk

D

Total portfolio risk refers to the overall risk associated with a portfolio of investments. It takes into account various types of risks, including systematic risk and non-diversifiable risk.

Systematic risk is the risk that is inherent in the overall market and affects all securities to some degree. It is also known as market risk, and it cannot be eliminated through diversification. Examples of systematic risk include economic downturns, natural disasters, geopolitical events, and changes in interest rates.

Non-diversifiable risk, also known as unsystematic risk or company-specific risk, refers to the risk that is specific to an individual security or a particular sector of the market. This type of risk can be eliminated or minimized through diversification. Examples of non-diversifiable risks include company-specific events such as lawsuits, management changes, or product recalls.

Avoidable risk refers to the risk that can be eliminated by diversification, while diversifiable risk refers to the risk that can be reduced by adding more securities to a portfolio. Avoidable and diversifiable risks are the same type of risk.

Unavoidable risk refers to the risk that cannot be eliminated through diversification, such as systematic risk.

Answer (A) is correct: Total portfolio risk is equal to systematic risk plus non-diversifiable risk. This answer correctly combines the two types of risks that make up total portfolio risk. Systematic risk cannot be diversified away, while non-diversifiable risk can be reduced by diversification but not eliminated entirely. Answer (B) is incorrect because it combines avoidable and diversifiable risk, which are two different terms for the same type of risk. Answer (C) is incorrect because it combines systematic risk and unavoidable risk, which are two different types of risk. Answer (D) is incorrect because it combines systematic risk and diversifiable risk, which are two different types of risk.