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

Question

BlackTom AI · Accepted Answer

Let’s break down what unsystematic risk means in the context of investments. Unsystematic risk is the risk that is specific to a particular asset or company and can be reduced through diversification.
Option A: 'I and IV only' includes asset-specific risk (I) and unique risk (IV), which are indeed part of unsystematic risk, but it omits diversifiable risk (II), which is a core descriptor of unsystematic risk. Hence this option is incomplete.
Option B: 'II and III only' pairs diversifiable risk (II) with market risk (III). While II is part of unsystematic risk, III is market risk, which is systematic and cannot be diversified away, so this combination is inaccurate.
Option C: 'I, II, and IV only' lists asset-specific risk (I), diversifiable risk (II), and unique risk (IV). All three are categories associated with unsystematic risk, and it correctly excludes market risk (III) from the list.
Option D: 'II, III, and IV only' again includes market risk (III), which is not unsystematic. Therefore this option incorrectly mixes in a systematic risk together with unsystematic risks.
Option E: 'I, II, III, and IV' includes market risk (III) alongside unsystematic components, which makes the statement inaccurate because it treats all four as unsystematic.
In summary, the options that correctly describe components of unsystematic risk are those that include I, II, and IV while excluding III, since market risk is the systematic portion of risk that cannot be diversified away.

FNBSLW 344-23 Chapter 11 Practice Quiz (not graded)

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

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