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Consider an economy with two types of firms, S and U. The S firms always move together, but U firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
-If the Reserve Bank was to change from an expansionary to contractionary monetary policy, this would be an example of:
A)unsystematic risk.
B)diversification risk.
C)systematic risk.
D)independent risk.

Question

Quizplus · Accepted Answer

A systematic risk affects the entire market or economy and is not specific to any particular firm or industry. A change in monetary policy by the Reserve Bank would affect all the firms in the economy, making it an example of systematic risk. Unsystematic risk is specific to a particular firm or industry, diversification risk can be reduced by spreading investments across different assets, and independent risk does not exist as all risks are interdependent in the economy.

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