Select the correct statement regarding systematic and unsystematic risk.

Question

BlackTom AI · Accepted Answer

Question reframe: The prompt asks us to select the correct statement about systematic and unsystematic risk from the given options.
Option 1: 'Unsystematic risk affects all firms simultaneously.' This is incorrect because unsystematic risk is firm-specific and diversifiable, not affecting all firms at the same time. Systematic risk, by contrast, affects the entire market.
Option 2: 'Beta measures both systematic and unsystematic risk.' This is not accurate. Beta is a measure of a stock's sensitivity to market (systematic) risk and does not capture unsystematic (diversifiable) risk, which is typically mitigated through diversification.
Option 3: 'Systematic risk can be diversified away by increasing the number of assets.' This is a common misconception. Systematic risk arises from market-wide factors and cannot be eliminated simply by holding more assets; diversifying can reduce unsystematic risk but not systematic risk.
Option 4: 'Systematic risk requires compensation via a risk premium.' This statement aligns with standard finance theory: investors demand a risk premium to bear systematic (non-diversifiable) risk, which is captured by expected returns and the market risk premium linked to beta. In other words, systematic risk is priced into assets and compensated through higher expected returns.
Overall, the reasoning shows why the first three statements mischaracterize the nature of unsystematic vs. systematic risk, while the fourth statement correctly reflects how systematic risk is priced in financial markets.

COMM_V 298 101 102 103 2025W1 Class 15 Practice Quiz

Select the correct statement regarding systematic and unsystematic risk.

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