Question

1. Henry worked in a bank for over 10 years and, because of his experience, he only likes to invest in bank stocks. 90% of Henry's portfolio is in the stocks Citigroup, JP Morgan Chase, Goldman Sachs, and Barclays Bank, while 10% is in technology stocks, mostly Apple. What kind of risk is Henry exposed to?

		Idiosyncratic Risk
		Systematic Risk
		Technical Risk
		Both idiosyncratic risk and systematic risk.

2. The difference between stocks and bonds is:

		There is no difference since stocks and bonds are both issued by corporations.
		Stocks trade on supply and demand, while bonds trade on issue date only.
		Stocks holders are equity investors, while bondholders are creditors.
		All of these are true.

Answer 1

Question 1

Correct Answer is Both idiosyncratic risk and systematic risk.

Systematic risk refers to the risk inherent to the entire market or market segment. (This risk cannot be diversified)

The idiosyncratic risk can be defined as the risk which affects a very diminutive number of assets, and can be almost eradicated through diversification.

Since Henry's portfolio is not diversified (because his portfolio contains 90% banking stocks) idiosyncratic risk remains due to non diversification.

And systematic risk is inherent to the entire market so it cannot be esacped

therefore henry is exposed to both idiosyncratic risk and systematic risk.

Question 2

The difference between stock and bond is Stocks holders are equity investors, while bondholders are creditors.