Business Degree Certification Practice Test

Which term best describes the risk associated with the overall market or economy affecting all firms?

1. Diversifiable risk

2. Systematic risk

3. Unsystematic risk

4. Behavioral risk

The correct answer is: Systematic risk

The term that best describes the risk associated with the overall market or economy affecting all firms is systematic risk. This type of risk is inherent to the entire market and cannot be eliminated through diversification. It includes factors such as economic downturns, interest rate changes, and natural disasters that influence the overall market performance. Systematic risk affects all investments and sectors, making it a significant concern for investors and firms alike. For example, during a recession, most companies will suffer from decreased consumer spending regardless of their individual circumstances. This broad impact highlights the interconnectedness of the economy and the way macroeconomic factors can influence the performance of all firms. Other risks, such as diversifiable risk, pertain to factors that can be mitigated through a diversified investment portfolio, which allows investors to reduce exposure to risks specific to individual assets or sectors. Unsystematic risk refers to risks that are specific to a particular company or industry and can be avoided through diversification. Behavioral risk relates to biases and emotional decision-making processes of investors, impacting their investment choices but not directly tied to market-wide influences.