Match each type of systematic risk on the left with its corresponding portfolio impact or economic driver on the right.
- Interest Rate RiskThe risk that an increase in prevailing market yields causes the secondary market price of existing fixed-income securities to decline.
- Purchasing Power RiskThe risk that continuous increases in general price levels erode the real buying power of fixed returns over time.
- Currency RiskThe risk that a strengthening home currency reduces the value of foreign-denominated income and capital gains when converted.
- Market RiskThe risk that broad economic downturns trigger a simultaneous market-wide drop in security prices across an asset class.
Answer
Interest Rate Risk matches with the decline in bond prices caused by rising yields; Purchasing Power Risk matches with the erosion of real buying power due to rising price levels; Currency Risk matches with reduced domestic gains from foreign-denominated holdings due to exchange rate shifts; and Market Risk matches with market-wide price drops driven by broad economic downturns.
Each systematic risk factor directly corresponds to its core macro driver: interest rate risk drives fixed-income price drops when yields increase; purchasing power risk erodes real investment returns via inflation; currency risk impacts foreign cash flow conversions; and market risk reflects systemic, un-diversifiable market downturns.
Step-by-Step Solution
Key Concept
Systematic and Market Risks