Energy cost is an example of …………

Question

BlackTom AI · Accepted Answer

The question asks about categorizing energy cost as a type of risk. 
Option 1: Unsystematic risk. This refers to risk that is specific to a particular company or industry. Energy costs impacting one company or a narrow subset of firms would be unsystematic, but energy prices generally affect the entire market and multiple sectors, so this option is not the best fit here.
Option 2: Systematic risk. Systematic risk, also known as market risk, arises from factors that affect the overall economy or broad segments of the market, such as commodity price movements, interest rates, or geopolitical events. Energy costs typically influence many assets and industries concurrently, making this the appropriate classification.
Option 3: None of the above. Given the common financial definitions, energy cost aligns with a broad market influence, so selecting none of the above would ignore the established concept of systematic risk.
Option 4: Total risk. Total risk combines systematic and unsystematic risk for an asset. While energy costs contribute to total risk, describing energy cost itself as total risk is not precise; it is better understood as a component of systematic risk, with total risk being the aggregate.
In summary, the most accurate categorization is that energy cost represents systematic risk because it tends to affect broad portions of the market rather than individual securities alone.

25400 Financial Literacy - Spring 2025 🔴 Practice Questions for In-class Quiz 2

Energy cost is an example of …………

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