
Explanation:
Systemic risk and correlation risk are highly dependent. During times of severe market stress or systemic events, the correlations between different assets and asset classes tend to increase significantly, often converging toward 1. This means that widespread market failures cause normally independent or uncorrelated assets to move downward together. Therefore, an increase in systemic risk inherently drives up correlation risk.
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Q.1556 Systemic risk refers to the risks that affect financial markets as a whole. Which of the following statements gives the correct relationship between systemic risk and correlation risk?
A
Systemic risk and correlation risk are partially dependent.
B
Systemic risk and correlation risk are highly independent.
C
Systemic risk and correlation risk are independent of each other.
D
Systemic risk and correlation risk are highly dependent.