Which type of risk is generally nondiversifiable?

Market risk is considered nondiversifiable because it arises from factors that affect the overall market, rather than specific companies or sectors. This type of risk encompasses broad economic changes, geopolitical events, and fluctuations in interest rates, inflation, and currency values. Since these factors impact all investments to some degree, diversifying within a portfolio does not eliminate market risk. Instead, it is something that investors must accept and manage through strategies like asset allocation or hedging.

In contrast, other types of risk, such as business risk, financial risk, and liquidity risk, can often be mitigated through diversification. Business risk is related to the specific operations of a company, financial risk deals with the capital structure and financial obligations of a company, and liquidity risk pertains to an investor's ability to quickly buy or sell an asset without causing a significant price change. Each of these risks can be reduced by holding a varied portfolio of investments, making them diversifiable in nature.