A portfolio analyst is conducting a risk breakdown for a diversified portfolio. Match each corporate event or market condition on the left with the primary non-systematic risk category it exemplifies on the right.
- A biotechnology firm suffers a steep earnings drop after its primary drug candidate fails to receive regulatory approval.Business Risk
- A highly leveraged retail corporation becomes insolvent when operating cash flows fall short of scheduled interest obligations.Financial Risk
- An institutional investor holding a custom private placement note must accept a steep price discount to complete an immediate sale.Liquidity Risk
- A corporate debenture issuer misses a scheduled semi-annual interest payment, triggering a credit rating downgrade to D.Credit (Default) Risk
Answer
Biotechnology product approval failure matches Business Risk; Highly leveraged debt service default matches Financial Risk; Private placement discount sale matches Liquidity Risk; Corporate debenture payment default matches Credit (Default) Risk.
Each scenario isolates a specific company-specific risk factor. Business risk is driven by operational/product performance; financial risk stems from debt leverage and capital structure; liquidity risk concerns ease of conversion to cash without price concessions; credit risk directly concerns an issuer's default on debt obligations.
Step-by-Step Solution
Key Concept
Classification of Non-Systematic and Credit Risks
Estimated Time:2m 0s