Question

If the Federal Reserve were to change from an expansionary to a contractionary monetary
policy, this would be an example of ________.
A) unsystematic risk
B) systematic risk
C) independent risk
D) diversification risk

Answer 1

Answer:

B) systematic risk

Explanation:

Federal Reserve changes in monetary policies affect the entire securities market hence considered a Systematic risk. It is also known as the Non-diversifiable risk ; it cannot be diversified away unlike stock specific or industry specific risk(unsystematic ) which can be eliminated through diversification.

Systematic risk is unavoidable and may be difficult to predict. Other examples include increase in long term interest rates, recessions or wars. Additionally, Investors are only compensated for systematic risk and not for diversifiable risk.