Question

A company faces two kinds of risk. A firm-specific risk

Answer 1

The two kinds of risk a firm faces are:

-- Firm-specific risk: It is a risk that occurs when the competitors enters the market and steal market share. These risks are fully diversifiable if firm enhances it's productivity, introduces cost controls, creating new products, innovations, etc. Moreover investors can also demand a higher return for their investment in such risk.

-- Market Risk: It is a risk that arises due to the overall performance of the financial markets such as recession. These risks through diversification cannot be eliminated however can be hedged against