Which one of the following is an example of a nondiversifiable risk?

Which one of the following is an example of a nondiversifiable risk? a. a well-respected chairman of the Federal Reserve Bank suddenly resigns b. a well-respected president of a firm suddenly resigns c. a poorly managed firm suddenly goes out of business due to lack of sales d. a key employee suddenly resigns and accepts employment with a key competitor e. a well-managed firm reduces its work force and automates several jobs

Answer

Nondiversifiable risk is the risk which cannot be mitigated or reduced and the risk is not in our control and hence the risk cannot be diversified. In the given alternatives only “a” is nondiversifiable risk as “a well respected chairman of the Federal Reserve Bank suddenly resigns” is not in our control. So no firm can prevent that as the Federal Reserve Bank is a Government body. All remaing alternatives are caused by the Firm and the Firm could have taken appropriate steps to stop the events and hence all other alternatives given in the question are diversifiable risks.

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