An investor allocates a significant portion of their fixed-income portfolio to debt securities issued by a single biotechnology firm awaiting regulatory approval for its primary product. If the product fails to obtain approval, the issuer's financial stability may suffer, raising the probability of default on its debt. Which type of risk does this situation represent, and what is the primary strategy to mitigate it?
- Non-systematic business and credit risk, which can be mitigated through asset diversification across multiple issuers.Cevap
- BInterest rate risk, which can be mitigated by holding the bonds to maturity regardless of the issuer's credit standing.
- CSystematic market risk, which can be mitigated by purchasing corporate bonds offering higher fixed coupon payments.
- DInflation risk, which can be mitigated by reinvesting interest payments into debt securities with longer maturities.
Cevap
Non-systematic business and credit risk, which can be mitigated through asset diversification across multiple issuers.
The correct answer identifies that risk stemming from a specific firm's operational outcome (such as a product failure) is non-systematic credit and business risk. Non-systematic risks are unique to a particular issuer and can be mitigated by spreading capital across multiple unrelated issuers.
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Anahtar Kavram
Non-systematic risk (business and credit risk) is issuer-specific and can be mitigated through diversification, unlike systematic market risk.