Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

Question

BlackTom AI · Accepted Answer

The statement describes bad managerial judgments or unforeseen negative events that affect a firm as company-specific or unsystematic, and claims their effects on investment risk can in theory be diversified away.
First, consider what unsystematic risk means: it refers to risk unique to a particular company or industry, such as management decisions, regulatory issues, or a product recall. This type of risk is not tied to overall market movements.
Next, assess the diversification claim: by holding a well-diversified portfolio across many firms and sectors, the idiosyncratic risks of individual companies tend to cancel out, reducing the portfolio’s overall unsystematic risk. The remaining risk—the portion that cannot be eliminated by diversification—is systematic risk, which is tied to broad market factors.
So, the statement that company-specific or unsystematic events can, in theory, be diversified away is consistent with standard portfolio theory. It acknowledges that diversification reduces these risks, even though it cannot remove systematic risk.
Note that there are practical limits to diversification (finite number of investments, correlations between assets, transaction costs, and concentration risks), but the core theoretical claim remains that unsystematic risk can be mitigated through diversification.
In this context, since the provided answer option is True, the analysis supports that classification: the statement correctly identifies unsystematic risk as diversifiable.

Business Finance Chapter 08 Quiz

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

View Explanation

Log in for full answers

Similar Questions

Which of the following statements regarding unsystematic risk is accurate?

Of the options listed below, which is the best example of unsystematic risk?

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

Which one of the following statements is accurate?

Of the options listed below, which is the best example of unsystematic risk?

An investor who owns a well-diversified portfolio would consider ________ to be irrelevant.

If an FIs trading portfolio of stock is not well-diversified, the additional risk that must be taken into account is

Which of the following terms can be used to describe unsystematic risk? I. asset-specific risk II. diversifiable risk III. market risk IV. unique risk

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler