Of the options listed below, which is the best example of systematic risk?

Question

BlackTom AI · Accepted Answer

To identify the best example of systematic risk, we need to distinguish between risks that affect the entire market (systematic) and risks that affect only a single firm or a specific occurrence (idiosyncratic).
Option 1: 'A flood washes away a firm's warehouse.' This is clearly a firm-specific (idiosyncratic) risk; it directly impacts only that firm or its immediate operations and does not inherently affect the broader market.
Option 2: 'Corn prices increase due to increased demand for alternative fuels.' This is more of a commodity-specific or sectoral risk; while it can influence many players in the commodity markets, it is still more targeted than broad market movements, and may not reflect a universal market shift.
Option 3: 'A city imposes an additional one percent sales tax on all products.' This is a policy/law change that could affect many firms within that jurisdiction, but its impact is region-specific and primarily affects consumer prices locally rather than creating a global market-wide risk.
Option 4: 'Investors panic causing security prices around the globe to fall precipitously.' This statement describes a broad, market-wide reaction that impacts many assets across different countries and sectors, illustrating the classic example of systematic risk arising from global investor sentiment or macroeconomic shocks.
Option 5: 'A toymaker has to recall its top-selling toy.' Similar to Option 1, this is a firm-specific issue with consequences mainly for that particular company and its investors, not for the entire market.
In summary, Options 1, 2, 3, and 5 describe risks that are more localized or sector-specific, whereas Option 4 captures a widespread market response that characterizes systematic risk.

BUSFIN 3220 AU2025 (2110) Exam 3 - Requires Respondus LockDown Browser

Of the options listed below, which is the best example of systematic risk?

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