Question

Does weather create systematic or unsystematic risk for investors? If you answered that weather creates systematic...

Does weather create systematic or unsystematic risk for investors? If you answered that weather creates systematic risk, explain why you would not be able to diversify away weather-related risk in a portfolio. If you answered that weather creates unsystematic (company-specific) risk, explain how you would eliminate weather-related risk in a portfolio.
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Answer #1

Although weather is a natural phenomenon, its affect on the various firms is largely dependent on the product portfolio of the firms. Therefore, the risk associated with weather conditions is unsystematic risk. It can be diversified by investing in the companies which benefit from such conditions.

Example: Ice Cream Companies and Soup companies will not deliver complimentary performance under the hot/cold weather conditions and can be invested in by the investors to do away with the unsystematic risk the weather poses.

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