Which one of the following is an example of diversifiable risk? The board of directors decides...

Which one of the following is an example of diversifiable risk?

The board of directors decides to reduce the firm's work force and announces a massive layoff.

The federal government lowers income taxes.

Interest rates decrease by one-and-a-half percent point.

The inflation increases unexpectedly.

Solutions

Expert Solution

Diversifiable risk is the risk which can be diversified or which is well within the control of the company. This risk is caused by internal factors and are company specific risk.

For example - Unsystematic risk is firm specific risk. The internal factors suh as management, labour conditions, efficiency, governance etc which are well within the control of the firm. The internal factors influences the returns of particular security. Unsystematic risk can be reduced by diversification.

Hence the correct answer is 1st one.

The board of directors decides to reduce the firm's work force and announces a massive layoff.

This is a diversifiable risk.

Other risk are out of the control of the firm. Those factors are caused by changes in the economic, social, cultural changes on which the firm has no control. The federal government lowers income taxes, Interest rates decrease by one-and-a-half percent point and The inflation increases unexpectedly are example of non diversifiable risk.

Hope it helps!

jeff jeffy answered 1 year ago

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