Question

1. Which of the following are examples of diversifiable risk?

   I. An earthquake damages an entire town

   II. The federal government imposes a $100 fee on all business entities

   III. Employment taxes increase nationally

   IV. All toymakers are required to improve their safety standards

   	A.	I and IV only
   	B.	II and IV only
   	C.	I and III only
   	D.	I, III, and IV only

Answer 1

DIVERSIFIABLE RISK IS THE RISK WHICH IS SPECIFIC TO A PARTICULAR SECURITY OR PARTICULAR SECTOR AND NOT DOES NOT AFFECT THE OVERALL MARKET OR ECONOMY.

WHERE AS NON-DIVERSIFIABLE RISK IS ONE WHICH AFFECTS WHOLE MARKET OR ALL SECTORS.

IN THE ABOVE EXAMPLES, OPTION II AND III ARE SUCH THAT THEY AFFECT ALL THE COMPANIES EQUALLY, SO THEY ARE NON-DIVERSIFIABLE RISK AS IT AFFECTS EVERY ONE IN THE SAME WAY.

BUT OPTION I AND IV ARE SUCH THAT THEY AFFECT THE PARTICULAR SECTOR (TOY INDUSTRY) OR A PARTICULAR COMPANY(COMPANY IN A TOWN WHERE EARTHQUAKE TOOK PLACE)

SO CORRECT ANSWER IS : I AND IV

ANSWER : A : I AND IV ONLY (Thumbs up please)