Question

In thinking about the types of risk (business, financial, interest rate, purchasing power, liquidity, event, and market), decide which primary type of risk (one type) is best associated with each event below.

• Company A with a beta of 3 -

• Company B with significant debt -

• Cable TV -

• Federal Treasuries (bonds) -

• Company C with a newly announced huge recall -

Answer 1

A. MARKET RISK- company with high beta will always be having a high degree of systematic risk associated with its movement, so it can be said that it is a having a high degree of market risk which cannot be diversified

B. FINANCIAL RISK- Company with higher amount of debt will be always exposed to high amount of financial risk because they will be having exposure to insolvency and financial distress cost

C. BUSINESS RISK- cable TV business will be having a higher risk related to business because they can be outdated and there will be a technology change.

D. LIQUIDITY RISK-United States Federal treasury bonds are issued for the longer time and there will be liquidity risk because they are liquidated in longer period time

E. EVENT RISK- company announcing with huge recall is having a event risk as this event can lead to adverse impact for company.