Equity price risk is a quantifiable risk because it can be measured in numerical terms. For instance, if a stock's price drops from $100 to $90, the equity price risk is quantifiable as a 10% loss. On the other hand, the risk of a terrorist attack is a non-quantifiable risk. It's a type of event risk that is inherently unpredictable and difficult to measure numerically. Its impact on investments is uncertain and cannot be precisely quantified.

Option A is incorrect because both interest rate risk and default risk are quantifiable risks. Interest rate risk, the risk that an investment's value will change due to a change in the absolute level of interest rates, can be measured in numerical terms. Default risk, the risk that a borrower will be unable to make the required payments on their debt obligations, can also be quantified, often using credit ratings or credit spreads.

Option B is incorrect because civil war is a non-quantifiable risk, while liquidity risk is a quantifiable risk. A civil war is a type of political risk that is inherently uncertain and hard to quantify. On the other hand, liquidity risk, the risk of not being able to quickly realize an investment without a substantial loss in value, can be quantified in terms of bid-ask spread, market depth, or impact cost.

Option D is incorrect because civil war is a non-quantifiable risk due to its unpredictable nature and broad impacts. Settlement risk, the risk that one party will fail to deliver the terms of a contract with another party at the time of settlement, can be quantified, often in terms of potential losses if a counterparty defaults at various points during the settlement process.

Things to Remember

• Quantifiable risks can be measured in monetary terms and often include market-related risks such as equity price risk, which can be directly quantified through financial metrics.
• Non-quantifiable risks, such as the risk of a terrorist attack, pose challenges due to their unpredictable nature and the difficulty in measuring their potential impact directly in numerical terms.
• Effective risk management requires a blend of strategies to address both quantifiable and non-quantifiable risks, including the use of insurance and contingency planning for the latter.