Match each non-systematic risk category to the real-world scenario that best illustrates it.
- Business RiskA company suffers profit losses due to poor executive decisions and product recall costs.
- Credit RiskA corporate bond issuer defaults on its scheduled interest payments due to insolvency.
- Liquidity RiskAn investor holding a private placement security cannot quickly convert it to cash without a major price discount.
- Regulatory RiskNew environmental compliance legislation sharply increases operating costs for a manufacturing firm.
Answer
Business Risk matches the scenario where a company suffers profit losses due to poor executive decisions; Credit Risk matches the bond issuer defaulting on scheduled interest payments; Liquidity Risk matches the investor unable to quickly convert a private placement to cash without price concession; Regulatory Risk matches new environmental compliance legislation increasing operating costs.
Business Risk pairs with losses caused by management mistakes or product issues. Credit Risk pairs with a debt issuer defaulting on coupon payments. Liquidity Risk pairs with the difficulty of quickly converting a security into cash at fair value. Regulatory Risk pairs with government rule changes impacting business operations.
Step-by-Step Solution
Key Concept
Non-Systematic Risk Types and Definitions