Match each investor scenario on the left with its corresponding primary systematic risk factor on the right.
- An investor holding fixed-rate corporate bonds sees the market price of the portfolio fall following a series of central bank interest rate increases.Interest Rate Risk
- A retail investor holding a broadly diversified equity index fund experiences portfolio losses during an unexpected nationwide economic recession.Market Risk
- A retiree receiving fixed payments from a fixed annuity notices that the income purchases progressively fewer consumer goods over a 20-year period.Inflation (Purchasing Power) Risk
- A U.S.-based investor holding equity shares in a European corporation experiences lower U.S. dollar returns because the Euro weakened relative to the Dollar.Currency (Exchange Rate) Risk
Answer
Fixed-rate bond price drops match Interest Rate Risk; broad equity market declines match Market Risk; eroding fixed income purchasing power matches Inflation Risk; foreign investment value losses due to exchange rate shifts match Currency Risk.
Each investor situation illustrates a specific systematic risk factor: fixed-rate debt price declines from central bank tightening exemplify interest rate risk; broad equity declines in a recession exemplify market risk; eroded purchasing power of fixed cash flows exemplifies inflation risk; and conversion losses from foreign currency depreciation exemplify currency risk.
Step-by-Step Solution
Key Concept
Subtypes and characteristics of systematic (non-diversifiable) risks in securities markets.
Estimated Time:1m 30s