Which risk is company-specific and can be mitigated through diversification?

Which risk is company-specific and can be mitigated through diversification?

• A. Company (Non-Systematic) Risk
• B. Market (Systematic) Risk
• C. Time Value of Money
• D. CD

Answer: (A)

Diversification targets risks tied to a single issuer. This company-specific risk—also called unsystematic or idiosyncratic risk—comes from events that affect only one company, such as a product recall, leadership changes, or a failed project. By spreading investments across many different companies and sectors, the impact of any one company's misfortune is reduced, lowering overall portfolio risk. Market risk, on the other hand, is systematic and affects the entire market; it cannot be eliminated just by diversification. Time value of money isn't a risk type, it's about how value changes over time. A CD is a financial instrument, not a category of risk. Hence, the risk that is mitigated through diversification is the company-specific risk.

Diversification targets risks tied to a single issuer. This company-specific risk—also called unsystematic or idiosyncratic risk—comes from events that affect only one company, such as a product recall, leadership changes, or a failed project. By spreading investments across many different companies and sectors, the impact of any one company's misfortune is reduced, lowering overall portfolio risk.

Market risk, on the other hand, is systematic and affects the entire market; it cannot be eliminated just by diversification. Time value of money isn't a risk type, it's about how value changes over time. A CD is a financial instrument, not a category of risk. Hence, the risk that is mitigated through diversification is the company-specific risk.