What are the two main types of investment risks?

The correct answer highlights the distinction between market risk and company unique risk, both of which are fundamental concepts in investment risk analysis.

Market risk refers to the potential for loss due to fluctuations in the overall market. This type of risk affects all investments in a market, driven by factors such as economic downturns, political instability, or changes in interest rates. Market risk cannot be eliminated through diversification, as it impacts a broad range of assets simultaneously.

On the other hand, company unique risk (also known as unsystematic risk) relates specifically to the individual circumstances of a company that can affect its stock price. This can include management decisions, competition, operational issues, or market position. Unlike market risk, company unique risk can be mitigated through diversification; by investing in a range of different companies or sectors, an investor can reduce the impact of any single company’s performance on their overall portfolio.

Recognizing the difference between these types of risks is essential for investors as they build diversified portfolios and seek to manage their exposure to various risk factors effectively.