General Securities Representative (Series 7) Practice Exam – Your All-in-One Guide to Exam Success!

Systematic risk, often referred to as market risk, is the type of risk that affects a large number of assets or the entire market, such as economic changes, political events, or natural disasters. This type of risk cannot be eliminated through diversification, as it impacts all firms and investments in the economy to some extent. Therefore, systematic risk is inherently tied to broad market movements that can affect overall investment performance.

Unsystematic risk, on the other hand, is specific to an individual company or industry. It arises from factors such as management decisions, operational challenges, and other events that can impact a particular firm. This type of risk is diversifiable, meaning that an investor can reduce their exposure to unsystematic risk by holding a diversified portfolio of various investments.

Given this context, the correct answer highlights that unsystematic risk is indeed diversifiable while systematic risk is not, emphasizing the fundamental difference between the two types of risk in the realm of investing. This understanding is crucial for investors when constructing their portfolios and assessing potential risks.