alleryStart learning →A single company's accounting scandal is a risk that diversification can:
ANever affect at all
BMake considerably worse
CConvert into market risk
DLargely protect against
Answer & Solution
Correct answer: D. Largely protect against
1. Match the risk type to what diversification does.
2. Accounting irregularities being detected is given as unsystematic risk.
3. Portfolio diversification protects you from being significantly impacted by unsystematic risk.
4. Systematic risk is different, being the risk of holding the market portfolio.
5. So a single firm's scandal is largely diversifiable.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 15 'Risk, Return, and Capital Market Theory'_
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