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Which of the following risk(s) is (are) diversifiable?Select one or more alternatives:The risk that short-term interest rates increase unexpectedly.The risk that an oil tanker ruptures, creating a large oil spill.The risk of global pandemic.The risk that is going to rain tomorrow.

Question

Which of the following risk(s) is (are) diversifiable?Select one or more alternatives:The risk that short-term interest rates increase unexpectedly.The risk that an oil tanker ruptures, creating a large oil spill.The risk of global pandemic.The risk that is going to rain tomorrow.

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Solution

The risks that are diversifiable are those that are unique to a specific company or industry, also known as unsystematic risks. These risks can be reduced through diversification, i.e., by investing in a variety of assets, industries, or sectors.

  1. The risk that short-term interest rates increase unexpectedly: This is a market risk, which is non-diversifiable. It affects all companies and industries, not just one.

  2. The risk that an oil tanker ruptures, creating a large oil spill: This is a diversifiable risk. It is specific to the oil industry or a particular company within that industry. By investing in a variety of industries, this risk can be reduced.

  3. The risk of a global pandemic: This is a non-diversifiable risk. A global pandemic affects all industries and companies, not just one.

  4. The risk that it is going to rain tomorrow: This is a diversifiable risk. It may affect certain businesses (like outdoor events or agriculture), but not all. By investing in a variety of industries, this risk can be reduced.

So, the diversifiable risks from the options provided are: The risk that an oil tanker ruptures, creating a large oil spill and the risk that it is going to rain tomorrow.

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