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Zorluk: ZorNon-Systematic and Credit Risks

An investor holds a portfolio comprising U.S. Treasury notes, speculative-grade corporate debentures, and common stock of a regional airline. The financial advisor is evaluating the portfolio's exposure to non-systematic and credit risks. Which of the following statements regarding the risk profile of this portfolio are correct?

  1. The common stock of the regional airline exposes the portfolio to business risk, which can be mitigated through asset diversification across un-correlated industries.Cevap
  2. B
    The U.S. Treasury notes in the portfolio carry substantial credit risk because their debt service depends on private corporate revenue generation.
  3. A credit rating downgrade of the corporate debentures represents an issuer-specific credit risk event that primarily impacts the price of those specific bonds rather than the entire fixed-income market.Cevap
  4. D
    Increasing the allocation to corporate debentures eliminates systematic interest rate risk while protecting the portfolio against issuer default.

Cevap

The correct statements are that holding common stock of a regional airline exposes the portfolio to business risk that can be reduced via diversification, and that a credit rating downgrade on corporate debentures is an issuer-specific non-systematic risk.
Business risk associated with holding equity in a single airline company is non-systematic and can be mitigated through broad sector diversification. Additionally, a credit rating downgrade of a corporate debenture is an unsystematic credit risk event unique to the issuing company's financial condition.

Adım Adım Çözüm

1
Differentiate between systematic and non-systematic risks.
Systematic risks (such as interest rate risk and market risk) affect the entire market and cannot be diversified away. Non-systematic risks (such as business risk and financial risk) are unique to a company or industry and can be reduced by diversifying across different asset classes and sectors.
Understanding diversifiability is fundamental to identifying non-systematic risks.
2
Evaluate the risk characteristics of the equity holding.
The common stock of the regional airline carries business risk (an unsystematic risk specific to airline operations). Diversifying across other industries mitigates this specific risk.
Company-specific operational challenges represent non-systematic risk.
3
Assess the credit risk of the fixed-income securities.
U.S. Treasury securities have minimal to no default/credit risk because they are backed by the federal government. Conversely, corporate debentures carry credit risk, and a rating downgrade reflects issuer-specific financial deterioration (non-systematic credit risk).
Credit risk measures the likelihood of an issuer defaulting on interest or principal payments.

Anahtar Kavram

Non-Systematic Risk vs. Systematic Risk and Credit Risk Fundamentals
Tahmini Süre:2m 0s
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Konular

Non-Systematic and Credit Risks

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