What is an Undiversifiable Risk?
An asset?s total risk can be divided into systematic risk and unsystematic risk. Systematic risk is a market related risk, which cannot be reduced by simple diversification. This risk is common to all securities. What is diversifiable risk? An unsystematic risk is that portion of the risk that is unique to the firm. Unsystematic risk can be reduced to zero by simple diversification. Simple diversification is the random selection of securities that are to be added to a portfolio. As the number of randomly selected securities added to a portfolio is increased, the level of unsystematic risk approaches zero. Other Articles • high yield investment programs…. • high yield savings…. • how do i invest…. • hyip investment…. • international capital market….
Undiversifiable risks are the common risks that are associated with the rate of fluctuation or change that takes place in any given investment market. While a certain degree of undiversifiable risk is considered to be part of the normal process of engaging in the buying and selling of stock options, many analysts recommend a balance between assets and liabilities as a means of minimizing the amount of market risk involved with any investment strategy. One of the most common methods of achieving this balance in relation to undiversifiable risk is to recognize the nature of the investment market. At any given point in time, some investments will be rising in value, while others remain stagnant or are in a period of decline. The principle of systematic risk involves balancing the elements of the portfolio so that gains with one investment helps to offset the temporary loss incurred with another investment. In order to manage this process, the investor would want to diversify the investmen
