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What is the difference between a diversifiable riskand a nondiversifiable risk? Should stock portfoliomanagers try to eliminate both types of risk?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 4QTD

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Question

What is the difference between a diversifiable risk
and a nondiversifiable risk? Should stock portfolio
managers try to eliminate both types of risk?

Definition Definition Act of managing the funds of another individual, company, or institution to maximize their wealth within a given time. Portfolio management helps to achieve financial objectives by reducing the risk of loss.

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Explain how the portfolio approach to investment allows the reduction of risk and why Beta therefore is the most appropriate measure of stock risk?
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Which of the following statements is CORRECT? a. Portfolio diversification reduces the variability of returns on an individual stock. b. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events. c. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. d. A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio. e. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.