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How is hedging different from diversification? a
How is hedging different from diversification?
a. Through hedging, we try to manage the systematic risk of a portfolio, whereas, through diversification, we try to reduce the unique risk.
b. Through hedging, we try to manage the unique risk, whereas, through diversification, we try to manage the systematic risk of a portfolio.
c. Through hedging, we try to reduce both the systematic and the unique risk.
d. Through diversification, we try to reduce both the systematic and the unique risk.
Expert Solution
The correct answer is Option A
The Hedging is used to reduce the systematic risk as it affects the overall market while the diversification can not be used to reduce the systematic risk while it can be used to reduce the unsystematic risk which is unique risk.
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