Diversifiable or an undiversifiable risk
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In the following 3 scenarios, identify if they represent a diversifiable or an undiversifiable risk. Consider these scenarios in terms of the viewpoint of investors and explain it.
The 3 scenarios are:
1. A a large hurricane severely damages a major us city
2. A substantial unexpected drop in the price of oil
3. The CEO of a major corporation is found to be guilty by a jury and sentenced to 6 months in jail.
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Solution Summary
The solution explains how to differentiate between diversifiable and an undiversifiable risk.
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Divserifiable risks are risks specific to a company or local economy. An investor can reduce such specific risks of a company by forming a portfolio of stocks. For example say you have stock in an umbrella manufacturer. If it does not rain too much, the manufacturer has a risk that it will not get any sales. This is a risk specific to umbrella ...
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