FRM Financial Risk Manager Practice Test

It is not possible to avoid the systemic risk through diversification because the systemic risk affects the whole financial system, not just a particular section. Thus, the risk cannot be diversified away.

Key Takeaway: The power of diversification means that when an investor diversifies his portfolio into different assets (i.e. investing in different assets at the same time), he reduces the risk dramatically. However, since systemic risk does affect the whole system, it’s impossible to diversify the risk.