Question

In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

Answer 1

Diversifiable Risk :

Diversifiable risk is the possibility that there will be a change in the price of a security because of the specific characteristics of that security. Diversification of an investor's portfolio can be used to offset and therefore eliminate this type of risk. Diversified risk differs from the risk inherent in the marketplace as a whole.

Non Diversifiable Risk:

Risk which is common to a whole of assets and liabilities.

Being unavoidable and non compensating for exposure to such risks, non-diversifiable risk can be taken as the significant section of an asset's risk attributable to market factors affecting all firms. The Main reasons for this risk type include inflation,International incident etc.Moreover, it cannot be purged through diversification

Some risks are unique to that asset and can be eliminated by investing in different assets. some risks applies to all assets. Systematic risk can be controlled but by a costly effect on estimated returns.

Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unsystematic portion of the total risk can be eliminated at little cost. On the Other hand, there are systematic risks that effect all investments. This portion of the total risk of an asset cannot be costlessly eliminated.