What is Nondiversifiable risk?
Nondiversifiable risk. Risk that cannot be eliminated by having a large portfolio of many assets.
What is the meaning of unsystematic risk?
Unsystematic risk is the risk that is unique to a specific company or industry. It’s also known as nonsystematic risk, specific risk, diversifiable risk, or residual risk.
What is a fundamental risk?
Fundamental Risk — a risk intrinsic to the state of being, or an absolute hazard producing no uncertainty about whether the loss will occur, making the risk commercially uninsurable.
Why are some risks Nondiversifiable?
Non-diversifiable risk can be referred to a risk which is common to a whole class of assets or liabilities. The investment value might decline over a specific period of time only due to economic changes or other events which affect large sections of the market.
What is the difference between Diversifiable and Nondiversifiable risk?
Diversifiable risk refers to the portion of an asset’s risk attributable to firm-specific, random events (strikes, litigation, loss of key contracts, etc.) that can be eliminated by diversification. Nondiversifiable risk is attributable to market factors affecting all firms (war, inflation, political events, etc.).
Which of the following is the best definition of unsystematic risk?
Question: Question 17 Which of the following is the best definition of unsystematic risk A risk that influences a large number of assets. Also called market risk. A theory showing that the expected return on any risky asset is a linear combination of various factors.
Which is the best example of idiosyncratic risk?
Example of idiosyncratic risk For example, the changes in the tax policy, inflation, customer demands, and interest rates are some of the factors that affect the company’s stock price but have nothing to do with its managerial skills. Most importantly, it isn’t something the company can control or avoid.
How do you manage idiosyncratic risk?
The most effective way to mitigate or attempt to eliminate idiosyncratic risk is with the diversification of investments. Idiosyncratic risk, by its very nature, is unpredictable. Studies show that most of the variation in risk that individual stocks face over time is created by idiosyncratic risk.
What is the example of fundamental risk?
Examples of fundamental risks are high inflation, unemployment, war, and natural disasters such as earthquakes, hurricanes, tornadoes, and floods. Particular risks are risks that affect only individuals and not the entire community. Examples of particular risks are burglary, theft, auto accident, dwelling fires.
Which type of risk Cannot be eliminated by diversification?
Systematic risk cannot be eliminated through diversification. Also called non diversifiable risk and market risk.
How are diversifiable and nondiversifiable risk related?
Diversifiable risk refers to the portion of an asset’s risk attributable to firm-specific, random events (strikes, litigation, loss of key contracts, etc.) that can be eliminated by diversification. Nondiversifiable risk is attributable to market factors affecting all firms (war, inflation, political events, etc.).
How is hazard mitigation related to natural disasters?
It is more cost-effective to mitigate the risks from natural disasters than it is to repair damage after the disaster. Hazard mitigation refers to any action or project that reduces the effects of future disasters.
What are the impacts of a natural disaster?
For utilities, the impacts from these hazard events include damaged equipment, loss of power, disruptions to service, and revenue losses. Why Mitigate the Hazards? It is more cost-effective to mitigate the risks from natural disasters than it is to repair damage after the disaster.
What do you mean by unsystematic risk in investing?
The portfolio will still be exposed to systematic risk, which refers to the uncertainty that faces the market as a whole and includes shifts in interest rates, presidential elections, financial crises, wars, and natural disasters.