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Risk ManagementSection BRisk ManagementPortfolio TheorySystematic Risk

ACCA · Question 26.5 · Risk Management

Section B - Case 3: AeroFreight Logistics

Scenario: AeroFreight Logistics operates drone deliveries across Europe and Asia. The company is based in the UK (GBP). It owes a supplier €500,000 payable in 6 months.
Spot rate: €1.1500 - €1.1550 / £1
6-month forward rate: €1.1400 - €1.1460 / £1
UK 6-month borrowing rate: 4% (annual)
Euro 6-month deposit rate: 2% (annual)

Question 5: AeroFreight's operations are subject to various risks. According to portfolio theory, which TWO of the following represent systematic risk for AeroFreight?

Answer options:

A.

A global increase in interest rates

B.

A strike by AeroFreight's drone maintenance engineers

C.

A worldwide recession reducing global trade

D.

A new competitor entering the drone delivery market

How to approach this question

Differentiate between systematic risk (market-wide, cannot be diversified away) and unsystematic risk (company-specific, can be diversified away).

Full Answer

Systematic risk (market risk) is the risk inherent to the entire market or market segment. It affects all businesses and cannot be eliminated through diversification. Examples include changes in interest rates, inflation, and global recessions (Options A and C). Unsystematic risk is company-specific or industry-specific risk, such as strikes or new competitors (Options B and D), which can be mitigated by diversifying an investment portfolio.

Common mistakes

Confusing systematic risk with unsystematic risk.
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