Question

In: Finance

At a lovely Sunday picnic you impress your partner by discussing the core concept of risk...

At a lovely Sunday picnic you impress your partner by discussing the core concept of risk versus return. You explain that when investments are diversified across different asset classes the overall risk profile of the portfolio is improved. You continue by explaining that there are numerous types of risk. Which of the following are examples of unsystematic risk?

(1) Financial risk (due to the company’s excess leverage)

(2) Loss of market share

(3) Interest rate risk

(4) Business-cycle risk

a.

2 and 3
b.

1 and 2
c.

2 and 4
d.

1 and 4

Solutions

Expert Solution

Systematic risk is the uncertainty that affects all companies in the market segment equally and cannot be eliminated irrespective of diversification. It can be due to various factors that effect the market segment and the companies.

Ex: Market interest rates, Recession, Business cycle risk

Unsystematic risk on the other hand is company specific and can easily be mitigated by diversification. If a company is over exposed to debt or is loosing its market share due to inefficient management or competition, it's considered to be unsystematic risk.

Ex: Financial risk, Loss in market share.

So, the answer is OPTION B

jeff jeffy answered 3 years ago
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