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Identify the types of firm-specific factors that increase a firm's diversifiable risk...

Question:

Identify the types of firm-specific factors that increase a firm's diversifiable risk (idiosyncratic risk or nonsystematic risk).

Diversifiable Risk:

Diversifiable risk is the risks that are unique to one firm only. These risks keep varying from firm to another. These risks are called diversifiable since they can be reduced since they are in control of the management.

Answer and Explanation:

Factors that cause firms diversifiable risk to increase include:

  1. Labor problems which can lead to workers strikes.
  2. Inadequate management competencies where the management lacks key competences that are required to manage a business. leading to adverse variation of profits.
  3. A change in technology. Some technology may be too expansive to install and operate too. This will, therefore, the profits earned will be adversely affected.

Learn more about this topic:

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Investment Risks: Definition & Types

from Finance 305: Risk Management

Chapter 3 / Lesson 3
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