Match each non-systematic or credit risk category on the left with the real-world investment scenario on the right that best illustrates it.
- Credit RiskA municipal revenue bond issuer fails to make scheduled principal and interest payments due to severe shortfall in toll collections.
- Business RiskA software firm experiences declining operating income following market adoption of a competitor's innovative cloud platform.
- Liquidity RiskAn investor holding a private placement limited partnership note must accept a steep discount to execute a fast sale.
- Regulatory RiskA regional energy producer incurs major operational halts after new environmental legislation bans hydraulic fracturing in its operating zone.
Answer
Credit Risk matches the municipal revenue bond issuer defaulting on payments; Business Risk matches the software firm suffering operating income decline due to competitive innovation; Liquidity Risk matches the limited partnership note requiring a steep discount for rapid sale; Regulatory Risk matches the energy producer halted by new environmental legislation.
Each matching pair correctly identifies the specific non-systematic risk factor. Non-systematic risks are company- or industry-specific risks that can be mitigated through diversification. Credit risk concerns debt default, business risk concerns core operational viability, liquidity risk concerns ease of resale, and regulatory risk concerns legislative impact.
Step-by-Step Solution
Key Concept
Non-Systematic Risk Classification and Credit Risk Identification