An investor is reviewing portfolio risk concepts with a registered representative. Which of the following statements regarding non-systematic risk and credit risk are correct?
- Business risk and regulatory risk are non-systematic risks that can be reduced through asset diversification.Answer
- Credit risk is the risk that a corporate bond issuer will fail to make timely payments of interest or principal.Answer
- CCredit risk is a systematic risk caused by changes in overall market interest rates that impacts all bond issuers equally.
- DNon-systematic risk affects the entire financial market and cannot be mitigated by diversifying across multiple issuers.
Answer
The correct statements are that business and regulatory risks are non-systematic risks that can be reduced through diversification, and credit risk is the risk that an issuer fails to meet interest or principal payment obligations.
Non-systematic risk is specific to an individual issuer or industry and can be effectively mitigated through diversification across different issuers. Credit risk directly measures the likelihood that a debtor will default on its interest or principal payments.
Step-by-Step Solution
Key Concept
Non-systematic risk is company- or industry-specific risk that can be diversified away, while credit risk measures the specific probability of issuer default on debt obligations.