The risk that a particular investment’s value is affected by company-specific events is called which type of risk?

• A. Inflation
• B. Specific Risk
• C. Market Risk
• D. Currency Risk

Answer: (B)

This question is about a risk that comes from events affecting only a single issuer or a small group of assets. That kind of risk is specific to the company and can arise from things like a product recall, management changes, legal troubles, or other company-specific developments. Because it’s tied to one company, you can often reduce it by holding a diversified portfolio—adding other, uncorrelated investments dilutes the impact of any one company’s problems. This is known as unsystematic risk (also called specific risk).

Inflation risk refers to loss of purchasing power across the economy, currency risk relates to exchange-rate movements on foreign investments, and market risk (systematic risk) affects nearly all assets in the market due to broad factors like economic cycles and interest rates. These cannot be eliminated by simply diversifying away from one issuer.