Unexpected inflation can benefit some people/firms and harm others. This is an example of:
A) systematic risk.
B) unmeasured risk.
C) idiosyncratic risk.
D) zero risk since the effects balance.

Question

Quizplus · Accepted Answer

Idiosyncratic risk refers to risk that is specific to an individual or a small group of investors. Unexpected inflation can have different effects on different individuals and firms depending on their exposure to inflation. For example, borrowers who have fixed-rate debt will benefit from unexpected inflation as the real value of their debt decreases. On the other hand, savers who hold fixed-rate financial instruments will experience a decline in the real value of their savings. This creates idiosyncratic risk because the impact of the inflation shock is idiosyncratic to the specific type of financial instrument held.

Unexpected Inflation Can Benefit Some People/firms and Harm Others