Match each type of non-systematic risk to the scenario or definition that best describes it.
- Credit (Default) RiskThe likelihood that a corporate debt issuer will fail to make scheduled interest or principal payments.
- Business RiskThe operational vulnerability of a company to poor management decisions, product obsolescence, or shifts in consumer demand.
- Liquidity RiskThe inability of an investor to sell a holding quickly in the secondary market without taking a significant price discount.
- Financial RiskThe heightened earnings volatility resulting from a corporation carrying excessive debt debt obligations in its capital structure.
Answer
Credit Risk matches debt repayment failure; Business Risk matches operational management failure; Liquidity Risk matches difficulty selling quickly without price concessions; Financial Risk matches excessive capital structure debt.
Non-systematic risks are issuer-specific. Credit Risk relates to default on debt obligations; Business Risk reflects operational and management execution; Liquidity Risk addresses the marketability of the asset; Financial Risk reflects capital structure leverage.
Step-by-Step Solution
Key Concept
Non-Systematic and Credit Risks