Question

Which one of the following is an example of a nondiversifiable risk?

Select one:

a. a well-managed firm reduces its work force and automates several jobs

b. a well-respected chairman of the Federal Reserve suddenly resigns

c. a well-respected president of a firm suddenly resigns

d. a key employee suddenly resigns and accepts employment with a key competitor

e. a poorly managed firm suddenly goes out of business due to lack of sales

Answer 1

Option b. a well-respected chairman of the Federal Reserve suddenly resigns is a non-diversifiable risk.

A non-diversifiable risk is one that affects the entire market and it is not specific to any company.

The sudden resignation of a well-respected chairman of the Federal Reserves negatively affects the entire market and hence it is non-diversifiable.

All the other answer options are specific to a firm and hence diversifiable.

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