Investors can reduce their exposure to which type of risk through portfolio diversification?

The ability to reduce exposure to company unique risk, also known as unsystematic risk, is a key principle of portfolio diversification. Company unique risk refers to the risks that are specific to a particular firm or industry, such as management decisions, product recalls, or competitive pressures. By investing in a diverse array of companies across various sectors, investors can mitigate the impact that the poor performance of any single company might have on their overall portfolio.

When a portfolio includes a variety of stocks or assets, the unique risks of individual companies tend to offset each other. For example, if one company faces a specific challenge that negatively affects its stock price, other companies in the portfolio may perform well, thus balancing the overall returns. Therefore, investors can achieve a more stable return and reduce potential volatility by diversifying their investments, primarily against company-specific risks.

In contrast, market risk, operational risk, and country risk are factors that affect all companies and cannot be eliminated through diversification. Market risk, associated with overall market movements, affects all securities and remains even in a diversified portfolio. Operational risk relates to internal processes and systems which, while significant, are not mitigated through asset diversification in the same way. Country risk involves exposure related to specific countries, such as political