Match each type of non-systematic risk to the corporate or investment scenario that best illustrates it.
- Business RiskA pharmaceutical company loses patent protection on its flagship medication, leading to a substantial decline in operating revenue.
- Credit (Default) RiskA corporate bond issuer experiences severe financial distress and fails to make a scheduled semi-annual interest payment to investors.
- Liquidity RiskAn investor holding a large block of thinly traded municipal revenue bonds cannot sell the position quickly without accepting a steep price discount.
- Regulatory RiskA sudden government policy change imposing strict carbon emission caps forces an energy firm to spend substantial capital on compliance.
Answer
Business Risk matches the pharmaceutical firm losing patent protection; Credit (Default) Risk matches the bond issuer missing an interest payment; Liquidity Risk matches the inability to quickly sell thinly traded bonds without a price concession; and Regulatory Risk matches new carbon emission policies imposing compliance costs.
Each non-systematic risk factor maps cleanly to a specific operational or financial threat unique to an issuer or security type: loss of patent impacts business revenue (Business Risk), missed debt payments represent default (Credit Risk), inability to liquidate thinly traded bonds without price concessions reflects illiquidity (Liquidity Risk), and statutory emission caps reflect policy shifts (Regulatory Risk).
Step-by-Step Solution
Key Concept
Non-systematic risks are company- or industry-specific risks that can be mitigated through portfolio diversification, including business risk, credit risk, liquidity risk, and regulatory risk.
Estimated Time:1m 30s