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

Question

BlackTom AI · Accepted Answer

When evaluating risk types, it helps to distinguish between factors that affect the entire market (systematic risk) and factors that affect only a particular company or industry (unsystematic risk).
Option 1: 'An across-the-board increase in income taxes' This is a macroeconomic policy change that impacts all investments in the market to some degree, not something specific to one company or industry. Therefore, it represents systematic risk rather than unsystematic risk.
Option 2: 'A decrease in the national level of inflation' A broad change in inflation affects the overall economy and many assets broadly. Since it shifts the environment in which all firms operate, it is a systematic factor, not an industry-specific shock.
Option 3: 'An adoption of a national sales tax' Implementing a nationwide tax policy changes the economic environment across many sectors. This is a broad, market-wide influence, i.e., systematic risk, rather than a risk confined to a single company or industry.
Option 4: 'An increased feeling of global prosperity' This describes a broad, macro-level sentiment that would influence the entire market positively. As with the other macro conditions, it affects many securities and is systematic in nature.
Option 5: 'A national decrease in consumer spending on entertainment' This specifically targets the entertainment industry as a sector—firms within that industry would likely be affected similarly, while other sectors could be unaffected or less affected. Such a sector-specific factor is characteristic of unsystematic (diversifiable) risk because it does not impact the entire market.
Thus, the best example of unsystematic risk among the options is the national decrease in consumer spending on entertainment, since it points to a condition that would mainly affect entertainment-related firms rather than the whole market.

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

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