Which of the following risks cannot be eliminated through diversification?

Systematic risk, often referred to as market risk, is the type of risk that is inherent to the entire market or market segment. This risk is influenced by macroeconomic factors such as changes in interest rates, inflation rates, political instability, and economic cycles. Because systematic risk affects all stocks and investments to some degree, it cannot be mitigated or eliminated through diversification.

When an investor diversifies their portfolio—spreading investments across various assets—this strategy is effective in reducing specific or unsystematic risks, which are risks unique to individual assets or companies. However, since systematic risk impacts the entire market collectively, holding a diversified portfolio does not protect against market-wide downturns or economic conditions that impact all sectors.

This fundamental distinction highlights why systematic risk remains undeterred by diversification efforts, making it crucial for investors to understand its implications in their investment strategies.