What type of risk cannot be eliminated through diversification?

Market risk, often referred to as systematic risk, cannot be eliminated through diversification because it is inherent to the entire market. This type of risk is influenced by broader economic factors that affect all companies, such as changes in interest rates, inflation, recessions, or geopolitical events. Because these factors impact the entire market rather than just individual companies, holding a diversified portfolio does not mitigate this risk.

In contrast, company unique risk, also known as unsystematic risk, arises from specific events that can affect a particular company or industry, such as management decisions, product recalls, or regulatory changes. Since these risks are specific to individual companies, they can be minimized or eliminated through diversification by holding a portfolio with a variety of investments across different sectors or industries.

Interest rate risk, while it can significantly affect the value of investments, especially bonds, is also a form of systematic risk that cannot be diversified away. Default risk, related to the possibility of a borrower failing to meet obligations, is another unique risk that can typically be managed through diversification in a portfolio by including assets with varying credit qualities. However, market risk remains a pervasive threat that affects all investments at a fundamental level regardless of diversification strategies.