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1) What is the difference between diversifiable risk and market risk? What type of risk is COVID-19 and why? 2) What industries or companies do you think have the most diversifiable risk and why? 3) How would you diversify your investment portfolio considering the coronavirus and quarintines and why?
1) What is the difference between diversifiable risk and market risk? What type of risk is COVID-19 and why?
2) What industries or companies do you think have the most diversifiable risk and why?
3) How would you diversify your investment portfolio considering the coronavirus and quarintines and why?
Expert Solution
- Diversifiable risk is also known as the ''Unsystematic risk'', or '' Specific risk'', or '' Residual Risk''. It is a company or Industry specific risk which arises due to Macro economic factors. This risk can be reduced by diversification or by investing at different industry. Increase in the price of the Cotton is a Diversifiable risk or ''Unsystematic risk'', or '' Specific risk'', or '' Residual Risk'' for the Cloting industry.
- Market risk is aslo called ''Systematic risk''. It arises due to Macro econimic factors and affects many industry and Companies. It is aslo known as the '' Non Diversifiable risk''. An investor can not eliminate such risk, but can take hedging position to reduce market risk. Increase in the interest rate is a market risk as it affects many industries and whole market.
- COVID-19 is a Market risk, because it affects many industries and almost affects whole market of the World.
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