This technique of mixing investments (diversification) in a portfolio with different or offsetting risks is most effective to reduce an: unsystematic risk.
Risk management can be defined as a strategic process which involves the identification, evaluation, analysis and control of potential risks (threats) that are present in a business as an obstacle to its capital, assets, revenues and profits.
An unsystematic risk is also referred to as a non-market risk or firm-specific risk and it can be defined as a type of risk that is typically reduced through diversification such as investing in other business firms (companies).
In this context, we can infer and logically deduce that an investor who has a risk-averse behavior would seek to reduce his or her risk by mixing investments (diversification) in a portfolio with different or offsetting risks is most effective to reduce an unsystematic risk..
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