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In a portfolio with 30% energy company, 30% health care company, 30% ETF, and 10% money market funds, which risk type is inherent?
Credit
Liquidity
Political
Nonsystematic
The correct answer is: Nonsystematic
In this portfolio composition, the presence of specific asset types indicates that the dominant risk type present is nonsystematic risk. Nonsystematic risk, also known as diversifiable risk, pertains to the potential for loss arising from an individual investment or industry. Since the portfolio is heavily allocated across different sectors, including energy, healthcare, an Exchange-Traded Fund (ETF), and money market funds, it demonstrates an attempt to mitigate risks associated with particular companies or sectors. By having 30% in both energy and healthcare, alongside an ETF—which typically includes a diversified group of securities—investors are reducing their exposure to any single company's or sector's poor performance. The inclusion of money market funds adds liquidity and stability, further diversifying the risk. Therefore, the specific selection of sector-based investments along with the allocated percentage indicates that while there is some inherent risk from these individual sectors, it is manageable and less 'systemic' compared to market-wide risks like credit, liquidity, or political risks, which can affect the entire market or economy more broadly. In contrast, credit risk pertains to the possibility that a borrower will default on a loan, which isn't directly relevant here as the portfolio is not structured around credit instruments like bonds or loans. Liqu