Question

In: Finance

1. Which of these risks will a diversified investor likely not need to worry about? a....

1. Which of these risks will a diversified investor likely not need to worry about?

a. A computer hack erases all electronic financial records of everyone in the country. b. A firm's key advertising executives quit to start their own company. c. A highly contagious virus emerges that turns humans into zombies.

a. a only

b. b only

c. c only

d. a and b

e. a and c

f. b and c

g. will not need to worry about any of them

2. A broadly diversified investor considering making a small (relative to his existing portfolio) bond investment does not need to worry about the bond's ______ risk.

a. idiosyncratic

b. market

c. systematic

d. total

please explain, thanks!

Solutions

Expert Solution

A diversified investor need not worry about risks related to specific stock that is unsystematic risk. He should worry about systematic risk which is impacting all the investors.

a. A computer hack erases all electronic financial records of everyone in the country. This is systematic risk and investor should worry about it.

b. A firm's key advertising executives quit to start their own company. This is unsystematic risk and investor should not worry about it.

c. A highly contagious virus emerges that turns humans into zombies. This is systematic risk and investor should worry about it.

Therefore answer is option b. b only

(2)

A diversified investor need not worry about risks related to particular investment that is unsystematic risk / idiosyncratic risk. He should worry about systematic risk / market risk which is impacting all the investors.

A broadly diversified investor considering making a small (relative to his existing portfolio) bond investment does not need to worry about the bond's idiosyncratic risk

Therefore, Answer is Option a. idiosyncratic

Thumbs up please if satisfied. Thanks :)

jeff jeffy answered 7 months ago
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