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What is Diversifiable Risk?

Definition of Diversifiable Risk

Diversifiable Risk is the risk of price change to a specific security of a particular sector due to unique fluctuations, affecting only one company or one sector,rather than the market as a whole. However, while thespecificrisk may not be mitigated, the overall risk to an investor's portfolio can by diversifying the portfolio according to the specific risk involved. For example, in the current low oil price environment an investor may find that a particular oil company in which he owns shares has major operating exposure to non-profitable fields, so he can diversify his portfolio to counterbalance this risk by buying shares in other oil companies that do not have exposure to such non-productive assets, with the company having access to fields where the cost of production is lower, perhaps, and consequently there is still a profit to be made even with globally depressed oil prices. Alternatively, the investor may choose to capitalise on the low oil price by buying into a company that benefits from an operating environment in which oil prices are low, such as a major electricity company.
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