Classify each of the following events into those that are systematic sources of

Question

Classify each of the following events into those that are systematic sources of risk (risks that affect all stocks to some degree), and those that are non-systematic sources of risk (risks that affect a particular stock or a particular group of stocks). a. The Federal Reserve increases short-term interest rates unexpectedly. b. Coca-Cola's quarterly earnings report just issued was in line with analysts' expectations. c. Congress approves changes to the tax code that will increase the top marginal corporate tax rate. d. Lower net income for The Limited than expected e. The risk that the product design is faulty and the product must be recalled. f. Exxon makes a huge unexpected new oil discovery off the coast of Mexico

Explanation / Answer

Part a)

Increase in short term rates will impact the entire economy. So all the industries and companies will be affect by this. Therefore, this is systematic risk.

Part b)

This information will impact the stock of Coca Cola only. Other companies and stocks will not be impacted due to this. Therefore, it is a non-systematic risk.

Part c)

Increase in corporate tax rate will impact the entire economy. So all the industries and companies will be affect by this. Therefore, this is systematic risk.

Part d)

This information will impact the stock of The inited only. Other companies and stocks will not be impacted due to this. Therefore, it is a non-systematic risk.

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