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

• A. A recession affecting the entire economy
• B. A change in management at a local business
• C. A factory fire at a single company
• D. A product recall by one manufacturer

Answer: (A)

Verified step by step guidance

1. Understand the concept of systematic risk: it refers to the risk that affects the entire market or economy, not just a single company or industry.
2. Identify that systematic risk is also called market risk or undiversifiable risk because it cannot be eliminated through diversification.
3. Analyze each option to see if it impacts the whole economy or just a specific company or sector.
4. Recognize that a recession affects the entire economy, causing widespread impact on many businesses and industries, which fits the definition of systematic risk.
5. Conclude that events like a change in management, a factory fire, or a product recall affect only individual companies and represent unsystematic risk, which is company-specific.