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Zorluk: KolayNon-Systematic and Credit Risks

An investor is studying the risk characteristics of corporate bonds and common stocks. Which of the following statements regarding non-systematic risk are correct? (Select TWO correct statements.)

  1. Non-systematic risk is specific to an individual issuer, company, or industry sector.Cevap
  2. Non-systematic risk can be significantly mitigated by constructing a well-diversified portfolio.Cevap
  3. C
    Non-systematic risk includes broad economic factors such as overall market price fluctuations and federal interest rate changes.
  4. D
    Non-systematic credit risk is the primary risk faced by holders of long-term U.S. Treasury securities.

Cevap

The correct statements are that non-systematic risk is specific to an individual issuer or industry, and that it can be significantly mitigated through portfolio diversification.
Non-systematic risk refers to risks that are localized to a single firm or industry, such as financial distress, business failure, or credit default. Because these risks are independent across different issuers, investors can diversify away non-systematic risk by holding a varied portfolio of assets.

Adım Adım Çözüm

1
Define non-systematic risk in contrast to systematic risk.
Non-systematic risk represents microeconomic risks unique to a specific company or sector (e.g., credit/default risk, business risk, regulatory risk for an industry).
Understanding the definition helps isolate company-specific factors from broad market forces.
2
Identify the primary strategy for managing non-systematic risk.
Asset diversification across un-correlated industries and security types effectively eliminates non-systematic risk.
Company-specific losses are offset by gains in unrelated assets.
3
Distinguish non-systematic risk from systematic market factors and U.S. Treasury risk profiles.
Interest rate changes and overall market declines affect all securities (systematic risk), whereas U.S. Treasury securities carry market/interest rate risk rather than default credit risk.
Eliminating options that describe systematic risk ensures full concept mastery.

Anahtar Kavram

Non-systematic risk vs. Systematic risk and the role of diversification
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Konular

Non-Systematic and Credit Risks

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