Products & Their RisksQuestion 153 of 398
A single manufacturer's stock drops after the company loses a major product-liability lawsuit. This loss is an example of:
a.Systematic risk
b.Unsystematic (company-specific) risk
c.Interest rate risk
d.Purchasing-power risk
Explanation
A lawsuit affecting one specific company is a company-specific, or unsystematic, risk because it does not stem from broad market forces. This type of risk can be reduced through diversification, since holding many different companies dilutes the impact of any single firm's misfortune. Market-wide events, by contrast, would be systematic risk.
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