Systematic risk...

Question

Systematic risk...

BlackTom AI · Accepted Answer

Question context is about systematic risk in finance. We will evaluate each answer option on its accuracy and alignment with the standard definition of systematic risk.
Option 1: 'is market risk that can be eliminated, or at least minimized, by creating a well diversified portfolio.' This statement is incorrect because systematic risk, by definition, cannot be eliminated through diversification. It affects the entire market and is not asset-specific, unlike unsystematic risk which can be reduced by diversification.
Option 2: 'is company-specific risk measured by that cannot be eliminated, or at least minimized, by diversification..' This option confuses systematic risk with unsystematic (diversifiable) risk. Company-specific risk is the type that diversification can reduce, whereas systematic risk is market-wide and not diversifiable. The wording here is also awkward and suggests a misattribution of the measurement focus to the wrong risk type.
Option 3: 'is caused by company-specific factors such as exposure to competitive pressures, supply chain issues, and industry technology trends. These factors are distinguished for each firm using beta.' This describes unsystematic, firm-specific risk rather than systematic risk. The listed factors are idiosyncratic to a single firm or industry, and while beta is a measure used in CAPM to gauge systematic risk relative to the market, the first part of the statement misattributes the risk; beta is not used to distinguish company-specific factors, because those factors contribute to diversifiable risk.
Option 4: 'is market risk that cannot be diversified away and is an integral component of the capital asset pricing model (CAPM).' This matches the standard definition of systematic risk: market-wide risk that affects nearly all assets and cannot be eliminated through diversification, and it is central to CAPM which uses beta to quantify sensitivity to market movements. The statement correctly links systematic risk to CAPM.

FA25-BL-BUS-F370-8099 Prep 12.1

Systematic risk...

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