Match each non-systematic risk category on the left with the investment scenario on the right that best illustrates it.
- Business RiskA biotechnology firm experiences a sharp revenue collapse after its key drug candidate fails to secure regulatory approval.
- Financial RiskA company with an exceptionally high debt-to-equity ratio faces severe profit volatility due to heavy fixed debt service costs during a downturn.
- Credit RiskA corporate bond issuer defaults on its commitment to make a scheduled semi-annual interest payment to bondholders.
- Liquidity RiskAn investor holding a thinly traded municipal revenue bond cannot sell the position quickly without taking a significant price discount.
Answer
Business Risk pairs with drug candidate failure; Financial Risk pairs with high debt-to-equity ratio volatility; Credit Risk pairs with corporate bond interest default; Liquidity Risk pairs with inability to quickly sell thinly traded municipal bonds without price concessions.
Each non-systematic risk matches its defining characteristics: Business risk is operational failure, Financial risk is leverage burden, Credit risk is obligation default, and Liquidity risk is secondary market illiquidity.
Step-by-Step Solution
Key Concept
Categorization of Non-Systematic Risk Types