Financial Risk Manager Part 1

Systemic risk and specific risk are two fundamental concepts in finance and investment. Systemic risk refers to the risk that can affect the entire economy. It is often associated with significant events or disruptions that have far-reaching impacts, such as the failure of a major financial institution, a significant disruption in a critical market or infrastructure, global pandemics, natural disasters, and geopolitical events that can disrupt global trade and financial flows. These risks are non-diversifiable, meaning they cannot be eliminated through diversification. On the other hand, specific risks are risks that affect only a particular company or line of business. These risks are often related to the company's operations, management, or industry-specific factors. Examples of specific risks include product recalls, labor strikes, and changes in consumer preferences. Unlike systemic risks, specific risks are typically diversifiable, meaning that investors can reduce their exposure to these risks by investing in a diversified portfolio of assets.

Choice B is incorrect because it reverses the definitions of systemic and specific risks. Systemic risks are not borne by a single entity; instead, they affect the entire economy. Conversely, specific risks are not borne by the economy as a whole; they are risks that affect only a particular company or line of business.