Because events causing business-specific risks are random, their effects simply cancel out when added together over a substantial number of stocks. This canceling effect enables us to say that business-specific can be "diversified away."

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Business-specific risks can be diversified away by investing in a variety of stocks, as the random nature of these risks causes their effects to cancel out when added together over a large number of stocks. This is a fundamental principle of modern portfolio theory.

Because Events Causing Business-Specific Risks Are Random, Their Effects Simply