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Answer: Neither statement by Reilly nor Meyers are correct.
**Explanation:** - **Reilly's statement is incorrect**: Investment grade bonds are still subject to event risk. Event risk refers to unexpected events that can negatively impact a company's ability to meet its debt obligations, such as mergers, acquisitions, restructurings, or other corporate events. Even investment grade bonds can experience downgrades or defaults due to such events. - **Meyers's statement is incorrect**: While event risk is indeed idiosyncratic (firm-specific), having a small number of different issues actually increases concentration risk rather than making event risk negligible. With fewer holdings, the portfolio is more vulnerable to any single event affecting one of the issuers. A well-diversified portfolio would have many different issues to spread this idiosyncratic risk. Therefore, neither statement is based on correct assumptions.
Author: LeetQuiz Editorial Team
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Joe Reilly, FRM, and Claire Meyers, FRM, are discussing the level of event risk in their bond portfolio. Reilly says that since their portfolio consists of investment grade bonds, event risk should not be a concern. Meyers says that since they have a small number of different issues in their portfolio, and event risk is idiosyncratic, the event risk in their portfolio is negligible. Which, if either, of these statements is based on correct assumptions?
A
Neither statement by Reilly nor Meyers are correct.
B
The statement made by Reilly is correct, but not the one made by Meyers.
C
The statement made by Meyers is correct, but not the one made by Reilly.
D
Both statements made by Meyers and Reilly are correct.
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