An institutional investment manager is analyzing the risk exposure of a mixed asset portfolio holding corporate bonds and equity securities amid shifting macroeconomic conditions. Which of the following statements correctly describe the characteristics and impact of systematic risk on this portfolio?
- Market risk and interest rate risk represent systematic risks that affect overall markets and cannot be fully eliminated through asset diversification.Cevap
- Purchasing power risk erodes the real value of fixed-coupon interest distributions during periods of rising inflation.Cevap
- CBroadening sector allocation within domestic equities completely eliminates systematic market risk during a broad economic recession.
- DSystematic risk refers primarily to the risk of individual corporate bond issuers defaulting on interest and principal obligations.
Cevap
Systematic risk affects broad market segments and macroeconomic conditions, meaning it cannot be eliminated through portfolio diversification. Interest rate risk, market risk, and purchasing power risk are key forms of systematic risk. Inflation directly degrades the purchasing power of fixed interest payments. Conversely, sector diversification only eliminates non-systematic risk, and issuer default risk is a company-specific non-systematic risk.
Systematic risk encompasses macroeconomic factors—such as market risk, interest rate risk, and inflation/purchasing power risk—that impact entire security markets simultaneously. Asset diversification cannot mitigate systematic risk. Additionally, inflation systematically reduces the real buying power of fixed interest distributions.
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Systematic and Market Risks