NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
An investment adviser is performing a risk assessment for a new client. The client expresses concern about the potential for a specific company's stock, which they heavily own, to decline due to poor management decisions. This type of risk is best categorized as:
- AInterest rate risk
- BSystematic risk
- CMarket risk
- DBusiness risk
Show answer & explanationAnswer & explanation
Correct answer: D. Business risk
Business risk refers to the specific risks associated with a particular company's operations, management, or industry. Poor management decisions directly fall under business risk, which is a form of unsystematic risk.
Why the other options are wrong
- A. Interest rate risk relates to changes in interest rates affecting bond prices, not company-specific management issues.
- B. Systematic risk is non-diversifiable market risk, affecting broad asset classes, not specific company management.
- C. Market risk (systematic risk) affects all investments in the market, not just a single company due to management.
Business Risk
The risk inherent in a company's operations, management, and industry, which can impact its profitability and stock price.
- A form of unsystematic risk.
- Can be mitigated through diversification.
- Examples include management incompetence, product obsolescence, or labor disputes.
Memory trick: Risks are like 'BAD' news: Business, Averse, Diversifiable.