A registered representative is reviewing a portfolio primarily composed of energy and health care companies along with an ETF. Which of the following risks is inherent in this portfolio?

A registered representative is reviewing a portfolio primarily composed of energy and health care companies along with an ETF. Which of the following risks is inherent in this portfolio?

• A. Systematic
• B. Market
• C. Nonsystematic
• D. Currency

Answer: (C)

The correct answer identifies the inherent risks associated with a portfolio primarily composed of specific sectors, such as energy and healthcare companies. Nonsystematic risk, also known as specific or idiosyncratic risk, is the risk that can affect individual stocks or sectors but not the entire market. Since the portfolio is concentrated in particular industries, it is exposed to risks that are specific to those sectors, such as regulatory changes, technological advancements, or shifts in consumer demand. While systematic risk pertains to the overall market and affects all investments, including changes in economic factors or market sentiment, the context of this question emphasizes the unique sectors of the portfolio. Thus, the concentration in energy and healthcare means that events specific to these industries can significantly impact the portfolio's performance, demonstrating the essence of nonsystematic risk. This type of risk can potentially be mitigated through diversification across various sectors or asset classes, which is not applicable to this particular portfolio.

The correct answer identifies the inherent risks associated with a portfolio primarily composed of specific sectors, such as energy and healthcare companies. Nonsystematic risk, also known as specific or idiosyncratic risk, is the risk that can affect individual stocks or sectors but not the entire market. Since the portfolio is concentrated in particular industries, it is exposed to risks that are specific to those sectors, such as regulatory changes, technological advancements, or shifts in consumer demand.

While systematic risk pertains to the overall market and affects all investments, including changes in economic factors or market sentiment, the context of this question emphasizes the unique sectors of the portfolio.

Thus, the concentration in energy and healthcare means that events specific to these industries can significantly impact the portfolio's performance, demonstrating the essence of nonsystematic risk. This type of risk can potentially be mitigated through diversification across various sectors or asset classes, which is not applicable to this particular portfolio.