Which one of the following best describes fundamental risk?
A) A stock is overpriced, but your fund does not allow you to engage in short sales.
B) Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error.
C) You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.
D) A stock is trading in two different markets at two different prices.

Question

Quizplus · Accepted Answer

Fundamental risk is the risk associated with the asset or investment itself, such as changes in economic conditions or market conditions that affect the price of the asset. Option C describes the situation where the stock is believed to be underpriced, but market conditions persist in underpricing the asset, resulting in a negative impact on the investment in the short-term. Options A, B, and D relate to other types of risks such as market risk, model risk, and arbitrage risk, respectively.

Which One of the Following Best Describes Fundamental Risk