for each of the following risk, indicate whether the risk is systematic risk or idiosyncratic risk...
for each of the following risk, indicate whether the risk is systematic risk or idiosyncratic risk for a firm:
a. risk of the ceos death
b. risk of a global pandemic
c. risk of an earthquake in the city of a firms head quarters
d. risk of a nuclear war starting between any two nations in the world
e. risk of oil becoming free of cost
Homework Answers
Systematic risk is the risk which is inherent to the market. It is not company, firm or industry specific risk. Systematic risk cannot be diversified away. On the other hand, idiosyncratic risk or unsystematic risk is the risk of a particular firm, company, industry or country.
Based upon the above definitions we can classify the given items into these two types of risks:
(a) Risk of CEOs death - Idiosyncratic risk or Unsystematic risk. (because CEOs death is related to a particular company)
(b) Risk of a global pandemic- Systematic risk (because it is global risk or risk of market).
(c) Risk of an earthquake in the city of a firm's headquarters - Idiosyncratic risk or Unsystematic risk. (because this risk is specific to the city of headquarters and is related to a particular company).
(d) Risk of a nuclear war starting between any two nations in the world - Systematic risk (because it is global risk or risk of market).
(e) Risk of oil becoming free of cost - Systematic risk (because it is global risk or risk of market).
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