The correct answer is C.

The risk of strategic weaknesses in a business is a type of specific risk. Specific risk, also known as unsystematic risk, idiosyncratic risk, or diversifiable risk, refers to the risk associated with individual stocks in a portfolio. This risk can be reduced or eliminated from a portfolio through diversification. Strategic weaknesses in a business, such as poor management decisions, failed investments, or operational inefficiencies, are examples of specific risks as they directly impact the individual business and not the entire market.

Choice A is incorrect. The risk of changes in the consumer price index (CPI) is a type of systematic risk, not specific risk. Systematic risks are market-wide risks that affect all companies, such as inflation or interest rate changes. Changes in CPI represent inflationary trends and impact all firms rather than a specific one.

Choice B is incorrect. The risk of change in the aggregate demand of a specific sector also falls under systematic risk as it affects all companies within that sector and not just one particular company.

Choice D is incorrect. The risk of changes in tax rates is another example of systematic risk because tax policies usually apply to an entire economy and thus affect all businesses operating within that economy, not just one particular firm.

Things to Remember

• Specific risk in equity markets, such as strategic business weaknesses, can typically be mitigated through diversification across different sectors or geographical areas.
• Identifying and managing specific risks within a portfolio is crucial for optimizing returns and minimizing unnecessary exposure.
• Investors should assess the specific risks tied to individual stocks or sectors to better align their investment strategies with their overall risk management framework.