For each of the following, state whether it is a result of firm-specific risk or

Question

For each of the following, state whether it is a result of firm-specific risk or market risk.

a.Markets crash, leading to a global recession

b.The owners and managers of a firm decide to short-sell stock in the firm and drive the firm to bankruptcy, destroying the value of shares in the firm

c.A report of health risks associated with a new drug lowers returns on a pharmaceutical company.

d.A meteor hits the earth, drastically lowering stock returns.

e.Suppose a tech bubble bursts, which greatly affects tech stocks and marginally affects other stocks. Does this fit neatly into either category?

Explanation / Answer

a. Market risk

b. Specific risk

c. Specific risk

d. Market risk

e. It can be both. But majorly specific if impact on other stocks is not significant

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