It has been said to get potentially higher return, one must take risk. This is not entirely correct. There are two main sources of risks namely systematic and non-systematic risk.
Systematic risks are those which affects the entire broad market. Examples are interest rate risk, money supply, political risk, etc.
Non-systematic risks are those which are peculiar to the company concerned and does not affect the broad market. Examples of non-systematic risks are fraud, mismanagement, accounting "creativity", insider trading,etc.
Research has shown that taking on non-systematic risks do not translate to a potentially higher return in investments. Those who invests in a concentrated portfolio of stocks and bonds expose themselves to high non-systematic risk.
To eliminate non-systematic risk, diversification is the usual way to do that. Once non-systematic risk is eliminated through diversification, what is left is the systematic risk which research has shown to be the risk that translate to higher potential return.
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