Differentiate between fundamental risk and particular risk? Give example

Answer 1

Fundamental risk refers to risks that affect the entire market or economy and cannot be diversified away. These risks are systematic and affect all investments in a similar manner. Examples of fundamental risks include inflation, interest rate fluctuations, political instability, and economic downturns.

Particular risk, also known as specific risk or unsystematic risk, is the risk that pertains to a specific investment or company. These risks can be diversified away by investing in a portfolio of different assets or companies. Particular risks are unique to a specific investment and are not correlated to the overall market. Examples of particular risks include company-specific events such as management changes, product recalls, litigation, and competition.

To summarize, fundamental risks affect the entire market or economy and cannot be diversified away, while particular risks are specific to individual investments or companies and can be reduced through diversification.