Which risk is specifically tied to a unique firm as opposed to market or systemic factors?

The identification of specific risk as the correct answer comes from understanding the concept of risks in investment and business contexts. Specific risk, also called unsystematic risk, refers to the potential for a decline in the value of an asset due to factors that are unique to a particular company or industry. This could include events such as product recalls, management changes, regulatory challenges, or competitive pressures that directly impact that specific firm.

Unlike market risk, which is linked to broader economic factors and affects all companies within the market, specific risk is intrinsic to individual companies. For example, if a firm faces a labor strike, its stock may decline even if market conditions are stable. Therefore, the essence of specific risk lies in its direct relationship to the unique circumstances of a given firm rather than overarching market trends.

Understanding this distinction helps underscore how investors and analysts assess potential vulnerabilities and manage risk in their investment portfolios, emphasizing the importance of diversification to mitigate specific risks while recognizing that some elements of risk apply universally across the market.