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Unformatted text preview: can increase or decrease returns on stocks collectively 2. idiosyncratic or unsystematic risk - a unique risk that assets carry that does not affect the market as a whole, e.g. the price of Microsoft stock is affected by the government's anti-trust lawsuit Diversification can eliminate idiosyncratic risk but not systematic risk. Adding stocks to a portfolio reduces the variability of the portfolio's return by reducing the idiosyncratic risk. The average annual variability of the entire portfolio of stocks on the NYSE is 19.2%. This represents the risk that cannot be reduced through diversification. It is the market or systematic risk....
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