Non-diversifiable risk is also referred to as

Question

BlackTom AI · Accepted Answer

Non-diversifiable risk is also called systematic risk or market risk because it represents the portion of total risk that cannot be eliminated by holding a diversified portfolio.

1) Relevant knowledge points and concepts
- Total risk of an asset = systematic (market) risk + unsystematic (unique/firm-specific) risk.
- Systematic (non-diversifiable, market) risk arises from economy-wide factors (e.g., interest rates, inflation, recessions, geopolitical events). It affects virtually all assets and cannot be removed by diversification.
- Unsystematic (diversifiable, firm-specific, unique) risk arises from company- or industry-specific events (e.g., management decisions, strikes, product recalls) and can be reduced or eliminated through diversification.
- In CAPM and asset pricing, only systematic risk is rewarded because unsystematic risk can be diversified away.

2) Step-by-step reasoning
- Identify what “non-diversifiable” means: risk that remains after creating a well-diversified portfolio.
- Match that definition to standard finance terminology: the risk that cannot be diversified away is, by definition, systematic risk.
- Recognize that “market risk” is a common synonym for systematic risk because these economy-wide forces are market-wide.

3) Calculations
- No numeric calculation is required; this is definitional. Conceptually: as number of independent securities n → large, portfolio variance due to unsystematic risk → 0, leaving only systematic variance.

4) Why the correct answer is correct
- Systematic risk and market risk are interchangeable with non-diversifiable risk; they describe the same phenomenon (economy- or market-wide risk that cannot be diversified away).

5) Why other choices are incorrect (brief)
- Options that pair “unique” or “firm-specific” risk are wrong because those terms denote diversifiable (not non-diversifiable) risk.
- The option pairing “market risk; and diversifiable risk” is contradictory: diversifiable risk is the opposite of non-diversifiable.

Conclusion: The correct choice is “systematic risk, and market risk,” which matches the provided answer.

Non-diversifiable risk is also referred to asSingle choice

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