Answer: Stock 1

The nonsystematic risk (idiosyncratic risk) for each stock is calculated as follows: - **Stock 1**: Nonsystematic variance = (0.17)^2 - (0.9)^2(0.1)^2 = 0.0208 - **Stock 2**: Nonsystematic variance = (0.18)^2 - (1.1)^2(0.1)^2 = 0.0203 - **Stock 3**: Nonsystematic variance = (0.16)^2 - (1.2)^2(0.1)^2 = 0.0112 **Stock 1** has the highest nonsystematic variance, indicating the highest nonsystematic risk. Nonsystematic risk is diversifiable and specific to individual companies or industries, unlike systematic risk, which affects the entire market. Investors are not compensated for bearing nonsystematic risk because it can be mitigated through diversification.

Author: LeetQuiz Editorial Team