Question

28.

There is a portfolio that consists of a single stock. Which of the following types of “risk” can be reduced as the stocks issued by other companies are added to the portfolio?

I. Unexpected operational loss due to a massive product recall related to the passenger airbags

II. Unexpected introduced new tax code that will impose higher corporate tax rates

III. Decline in the nation’s economic growth expected for the next few year

IV. Resign of the firm’s CEO due to his personal scandal

I and IV

III and IV

II and III

II and IV

IV only

Answer 1

Option I is correct option  Product recall is a company specific risk which can be diversified by adding other stocks.
Option II is incorrect New Tax code affects the entire economy and is also systematic risk which cannot be diversified away.
Option III is incorrect . Nation;s economic growth is systematic risk and affects entire economy.This cannot be diversifies away.
Option IV is correct. Personal scandal of firm's CEO is company specific risk and hence it can be diversified away.

Option a.I and IV are correct options.