Of the options listed below, which is the best example of a diversifiable risk?

• A. The risk of changes in national interest rates
• B. The risk of inflation increasing across the entire economy
• C. The risk that a specific company's CEO resigns unexpectedly
• D. The risk of a global recession affecting all markets

Answer: (C)

Verified step by step guidance

1. Understand the concept of diversifiable risk: it is a type of risk that affects only a specific company or industry and can be reduced or eliminated through diversification of a portfolio.
2. Identify the risks that affect the entire economy or market, such as changes in national interest rates, inflation, or a global recession. These are systematic risks and cannot be diversified away.
3. Recognize that the risk of a specific company's CEO resigning unexpectedly is unique to that company and does not affect the entire market or economy.
4. Conclude that since diversifiable risk is company-specific and can be mitigated by holding a diversified portfolio, the risk of a CEO resigning unexpectedly is the best example of diversifiable risk among the options.
5. Summarize that diversifiable risks are idiosyncratic risks specific to individual firms, while systematic risks impact the whole market and are non-diversifiable.