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Zorluk: OrtaSystematic and Market Risks

An investor holds a diversified portfolio comprising 50 different U.S. corporate bonds with varying credit ratings and maturities. Despite the extensive diversification across issuers and industries, the portfolio experiences a significant decline in market value following an unexpected series of rate hikes by the Federal Reserve. Which of the following best explains why diversification failed to protect the portfolio's principal value?

  1. Interest rate risk is a systematic risk that impacts all fixed-income securities simultaneously and cannot be eliminated through asset diversification.Cevap
  2. B
    Diversification is only effective at eliminating credit risk if all corporate bonds in the portfolio carry an investment-grade rating.
  3. C
    The price of existing fixed-income securities rises when prevailing interest rates increase, causing an imbalance in portfolio valuation.
  4. D
    Market risk can be completely eliminated if the portfolio holds securities across at least 100 distinct corporate issuers.

Cevap

Interest rate risk is a systematic risk that affects all fixed-income securities simultaneously and cannot be eliminated through asset diversification.
Interest rate risk is a major component of systematic risk for fixed-income portfolios. When macroeconomic interest rates rise, existing fixed-income market values drop across the board. Because this risk affects the entire asset class simultaneously, diversifying across multiple issuers or industries within fixed income cannot eliminate it.

Adım Adım Çözüm

1
Identify the primary driver of the portfolio's decline in value.
The value loss was driven by Federal Reserve interest rate hikes, which increases prevailing market yields.
Changes in central bank policy rates cause broad interest rate movements across the fixed-income market.
2
Classify the type of risk causing the value reduction.
Interest rate risk is a form of systematic (market-wide) risk.
Systematic risks affect the entire market or asset class broadly rather than individual issuers.
3
Evaluate the limitations of diversification regarding systematic risk.
Diversification reduces unsystematic (business/credit) risk, but cannot eliminate systematic risk.
Because all fixed-income securities are subject to interest rate fluctuations, spreading investments across multiple issuers does not protect against broad interest rate increases.

Anahtar Kavram

Systematic Risk and Diversification Limits
Tahmini Süre:1m 15s
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Systematic and Market Risks

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