Which method can mitigate unsystematic risk?

Mitigating unsystematic risk, which is the risk associated with individual assets or specific companies, can be effectively achieved through diversification of investments across various assets. By holding a diverse portfolio that includes different types of assets—such as stocks from various industries, bonds, real estate, and other investments—an investor can reduce the impact that a poor performance from a single asset or a small group of assets has on the overall portfolio. This is because the performance of individual assets may not move in tandem; when one investment performs poorly, others may perform well, helping to balance overall returns.

While holding cash reserves provides liquidity and preservation of capital, it does not directly address the variability in returns caused by individual asset performance. Similarly, investing in a single stock inherently increases exposure to unsystematic risk, as the performance of that investment is subject to all the specific risks associated with that company. Trading frequently might lead to more opportunity to capitalize on short-term market movements, but it does not systematically reduce unsystematic risk.

Thus, diversification is a foundational principle in finance for managing risk, particularly unsystematic risk, making it the most effective method among the options provided.