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Zorluk: ZorNon-Systematic and Credit Risks

An investor holds a concentrated portfolio consisting primarily of 20-year corporate bonds issued by a single manufacturing firm. Following a major industrial accident and subsequent environmental litigation, credit rating agencies downgrade the issuer's debt from BBB (investment grade) to BB (speculative grade). At the same time, the Federal Reserve raises benchmark interest rates to curb broad inflationary pressures. Which of the following statements accurately distinguishes the non-systematic risk in this scenario from systematic risk, and identifies the appropriate mitigation strategy?

  1. The credit rating downgrade reflects default and credit risk, which is a non-systematic risk specific to the issuer that can be substantially reduced through portfolio diversification across different issuers and sectors.Cevap
  2. B
    The credit rating downgrade reflects systematic interest rate risk, which affects all corporate bond issuers equally and cannot be mitigated by diversifying across multiple debt issuers.
  3. C
    The Federal Reserve's benchmark rate hike represents business risk, a non-systematic risk that can be eliminated entirely by diversifying into corporate bonds of varying maturities.
  4. D
    Both the credit downgrade and the central bank interest rate hike represent systematic market risks resulting from economic headwinds, meaning neither risk can be reduced through diversification.

Cevap

The credit rating downgrade reflects default and credit risk, which is a non-systematic risk specific to the issuer that can be substantially reduced through portfolio diversification across different issuers and sectors.
The correct answer correctly identifies that a credit downgrade resulting from issuer-specific operational and legal difficulties represents credit/default risk, which is non-systematic. Non-systematic risks affect specific companies or industries and can be effectively mitigated through portfolio diversification across multiple issuers and sectors.

Adım Adım Çözüm

1
Analyze the portfolio event drivers into systematic vs. non-systematic risks.
The Federal Reserve rate hike affects all fixed-income securities broadly (systematic interest rate risk). The corporate debt downgrade due to litigation is unique to this single issuer (non-systematic credit risk).
Systematic risks stem from macro-level market dynamics, whereas non-systematic risks originate from company- or sector-specific events.
2
Determine the effect of diversification on non-systematic risk.
Non-systematic risks (such as credit, default, or business risk) can be diluted and managed by diversifying holdings across different issuers, asset classes, and economic sectors.
Specific adverse events impacting one firm will have a diminished impact on a broad, diversified portfolio.

Anahtar Kavram

Distinction between Systematic and Non-Systematic (Credit) Risk and the Role of Diversification
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Konular

Non-Systematic and Credit Risks

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