Products & Their RisksQuestion 170 of 398
A broad market decline during a recession causes almost every stock in a diversified portfolio to fall. This is an example of:
a.Unsystematic risk
b.Liquidity risk
c.Reinvestment risk
d.Systematic (market) risk
Explanation
A recession-driven, market-wide drop affects nearly all securities regardless of how well individual companies are run, which is the definition of systematic or market risk. Because it hits the whole market, diversification cannot eliminate it. Unsystematic risk, by contrast, would affect only a single company or sector.
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