The only condition under which the unsystematic portfolio risk can be reduced to zero is to combine securities that are perfectly negatively correlated (r = −1.0) with each other.

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The unsystematic risk of a portfolio is the risk that is specific to the individual securities in the portfolio. This risk can be reduced by diversifying the portfolio, which means investing in a variety of different securities. However, the only way to completely eliminate unsystematic risk is to combine securities that are perfectly negatively correlated with each other. This means that when the price of one security goes up, the price of the other security goes down.

The Only Condition Under Which the Unsystematic Portfolio Risk Can