Financial risk applies to both the additional variability in earnings available to common shareholders and the additional chance of insolvency caused by the use of financial leverage.

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Financial risk refers to the potential for financial losses or diminished returns that result from various financial transactions or activities. It applies to the additional variability in earnings available to common shareholders, as well as the increased likelihood of insolvency that may result from the use of financial leverage, such as debt financing. Therefore, both aspects of financial risk are true.

Financial Risk Applies to Both the Additional Variability in Earnings