Investment managers develop portfolios of different investments to combine, offset, and thereby reduce overall risk. Not all risks can be eliminated…

Rule: Portfolio theory is concerned with construction of an investment portfolio that efficiently

balances its risk with its rate of return. Risk is often reduced by diversification, the process of mixing

investments of different or offsetting risks. The broad categories of risk are summarized in the

following mnemonic to get us DUNS.

Diversifiable

Unsystematic (non market/firm-specific)

Non-diversifiable

Systematic (market)

Choice "d" is correct. Non-diversifiable risk cannot be eliminated by the application of portfolio

theory. Non-diversifiable risk is also referred to as systematic risk. (DUNS)

Choice "a" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio

theory. Diversifiable risks are also termed non-market risk.

Choice "b" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio

theory. Diversifiable risks are also termed unsystematic risk.

Choice "c" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio

theory. Diversifiable risks are also termed firm-specific risk.