What type of risk is unique to a specific security and can be eliminated through diversification?

The type of risk that is unique to a specific security and can be eliminated through diversification is diversifiable risk. This risk, often referred to as unsystematic risk, is associated with individual companies or industries. Factors contributing to this risk could include company management decisions, product recalls, or regulatory changes that specifically impact a particular firm's performance. By diversifying an investment portfolio—holding a variety of securities across different sectors and asset classes—investors can reduce the impact of any single security's poor performance on the overall portfolio, thus mitigating the effects of diversifiable risk.

Other types of risk listed, such as systematic risk, market risk, and liquidity risk, are inherent to the entire market or specific asset classes. Systematic risk, for instance, affects all securities and cannot be eliminated through diversification, as it encompasses broader economic or market changes. Therefore, diversifiable risk uniquely allows for reduction via strategic selection and allocation of different investments within a portfolio.