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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.
-'Independent risk' is more closely related to:
A)diversification risk.
B)common risk.
C)systematic risk.
D)unsystematic risk.

Question

Quizplus · Accepted Answer

Independent risk refers to the unsystematic or idiosyncratic risk that affects an individual firm and can be reduced through diversification. Choice A, diversification risk, is not a commonly used term and does not accurately describe the concept of independent risk. Common risk (choice B) and systematic risk (choice C) are both related to market-wide or macroeconomic factors that affect all firms in the market, whereas independent risk is specific to individual firms. Therefore, the correct answer is D, unsystematic risk.

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