Which one of the following is an example of a nondiversifiable risk?
A)a well respected chief executive of a firm suddenly resigns
B)a well respected chairman of the European Central Bank suddenly resigns
C)a key employee suddenly resigns and accepts employment with a key competitor
D)a well managed firm reduces its work force and automates several jobs
E)a poorly managed firm suddenly goes out of business due to lack of sales

Question

Quizplus · Accepted Answer

Nondiversifiable risk, also known as systematic or market risk, is caused by factors that affect the overall market, such as economic recessions, changes in interest rates, and political events. The sudden resignation of a well respected chairman of the European Central Bank falls under this category, as it can have an impact on the financial markets beyond the control of any individual company. The other options involve risks that are specific to individual companies and can be diversified away by investing in a portfolio of different types of companies.

Which One of the Following Is an Example of a Nondiversifiable