Match each investor scenario on the left with the primary subtype of systematic risk that directly impacts the portfolio's value or real return.
- A retiree receives fixed monthly income from corporate bonds, but discovers that rising consumer prices reduce the quantity of goods that income can purchase.Purchasing Power (Inflation) Risk
- A investor holding 20-year U.S. Treasury bonds experiences a noticeable decrease in market value after the Federal Reserve raises benchmark interest rates by .Interest Rate Risk
- A U.S.-based investor holding American Depositary Receipts (ADRs) of a foreign firm receives lower dollar-denominated dividend payout values after the local foreign currency depreciates.Currency (Exchange Rate) Risk
- An equity investor holding a broadly diversified 500-stock broad market fund suffers portfolio value losses during a widespread macroeconomic contraction.Market Risk
Answer
Each scenario correctly pairs with its systematic risk subtype: the fixed-income inflation scenario pairs with Purchasing Power (Inflation) Risk; the long-term bond price drop scenario pairs with Interest Rate Risk; the foreign ADR dividend conversion scenario pairs with Currency (Exchange Rate) Risk; and the broad equity fund market downturn scenario pairs with Market Risk.
Each scenario maps to its precise systematic risk subtype: inflation reduces the buying power of fixed bond income (purchasing power risk), rising interest rates lower existing bond values (interest rate risk), foreign currency weakness lowers converted dollar returns (currency risk), and market-wide economic declines reduce broad equity index values (market risk).
Step-by-Step Solution
Key Concept
Systematic risk affects the overall market or economy and cannot be eliminated through portfolio diversification. Primary systematic risk subtypes include market risk, interest rate risk, purchasing power (inflation) risk, and currency (exchange rate) risk.