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Answer: Item 1
## Explanation **A is correct.** A higher dependence on a single commodity makes a country's overall economy more vulnerable to changes in demand or prices of that commodity. This concentration risk increases country risk because: - Economic performance becomes heavily dependent on oil price fluctuations - Lack of economic diversification creates systemic vulnerability - Commodity price volatility can lead to significant economic instability **B is incorrect.** A legal system that provides for lawsuits against firms and their management allows investors recourse in the event of insider trading, fraud, or other actions that hurt investors, thereby lowering country risk. This enhances investor protection and legal certainty. **C is incorrect.** Because business activities inevitably generate disputes, firms do not want to invest in a country where the legal system is biased or subject to government interference. A more independent legal system reduces country risk by providing fair dispute resolution. **D is incorrect.** Declining credit spreads signal credit quality improvement. Narrower spreads indicate lower perceived default risk, which reduces country risk rather than increasing it.
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Bank QRS is considering extending loans to corporations based in a frontier market country. A credit risk analyst at the bank has conducted research on the country to determine factors that may affect its country risk and has compiled the following findings:
Which of these items is most likely to have a negative impact on the country's risk score?
A
Item 1
B
Item 2
C
Item 3
D
Item 4
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