Which of the following statements regarding unsystematic risk is accurate?

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BlackTom AI · Accepted Answer

Question restatement: Which of the following statements regarding unsystematic risk is accurate?
Option 1: 'It is measured by beta.' Beta specifically captures systematic (market) risk, not unsystematic risk, so this statement is inaccurate.
Option 2: 'It is related to the overall economy.' This describes systematic risk, which affects the entire market, not the diversifiable unsystematic risk, so this is incorrect.
Option 3: 'It is measured by standard deviation.' Standard deviation measures total risk (combining both systematic and unsystematic components) rather than isolating unsystematic risk alone, making this statement false.
Option 4: 'It can be effectively eliminated by portfolio diversification.' This is the defining characteristic of unsystematic risk: idiosyncratic risks arising from a specific company or industry can be mitigated by holding a diversified portfolio, so this is correct.
Option 5: 'It is compensated for by the risk premium.' The risk premium in asset pricing models typically compensates for systematic risk exposure, not diversifiable unsystematic risk, thus this statement is incorrect.

BUSFIN 3220 AU2025 (2110) Exam 3 - Requires Respondus LockDown Browser

Which of the following statements regarding unsystematic risk is accurate?

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