Question
Which of the following statement is correct: 1.A
company's earnings being negatively affected by a strike by its workers or a major lawsuit against the company is an example of systematic risk. 2.A company that relies heavily on a single supplier for raw materials is an example of unsystematic risk. 3.A company that has significant debt obligations. If the company experiences financial distress or default, the value of its debt securities may decline, and the company may be forced to declare bankruptcy this is an example of systematic risk. 4.Global economic recession or a financial crisis, which can lead to a general decline in the stock market, reduced consumer spending is an example of systematic risk. 5.When interest rates rise, the cost of borrowing increases, which can lead to decreased consumer spending and reduced economic activity is an example of unsystematic risk.Solution
Unsystematic risk, also known as company-specific risk, is the risk that is inherent in a particular company or industry, and is not related to the overall market or economy. It can be reduced through diversification of investments. A company that relies heavily on a single supplier for raw materials is exposed to unsystematic risk. If that supplier experiences a disruption in its operations, such as a natural disaster or bankruptcy, the company may not be able to obtain the necessary materials to manufacture its products, resulting in a loss of revenue and profitability. This risk is specific to the company and is not related to the overall market or economy. Global economic recession or a financial crisis, which can lead to a general decline in the stock market, reduced consumer spending, and decreased economic activity. These events are beyond the control of individual investors and affect all investments, regardless of their specific characteristics this is an example of systematic risk.
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