Question

Which of the following are examples of undiversifiable risk? (Select TWO from below.)

• A. People become diet conscious and avoid fast food restaurants.             
• B. The Federal Reserve suddenly increases interest rates.           
• C. Airline pilots go on strike.     
• D. The cold weather destroys Florida's citrus crop.         
• E. A public health crisis caused by the coronavirus pandemic affects all industries in the economy.     
• F. The price of lumber declines sharply.
• G. A fast-rising high tech company suddenly files for bankruptcy.             
• H. Two major companies in the pharmaceutical industry announce merger.

Answer 1

Answer - Option B and E

Undiversifiable risk is the risk that is applicable to all the firms or industries within the economy, and cannot be elimiated by diversification. Market compensates the investor for this risk only.

Option A is incorrect - this affects only restaurants and fast food chains, not to other players within economy.

Option C is incorrect - this affects only those within the airline industry

Option D is incorrect - affects firms only in Florida

Option F - affects firms that deal in lumber only

Option G - affects only the concerned tech company

Option H - affects only pharmaceutical companies involved in the transaction