Geopolitical Risk

Lesson

Geopolitical risk refers to the potential impact of political, economic, and social events on financial markets and investments. This type of risk is considered systematic because it affects all investments within a market rather than just specific securities or industries.

Practice Question #1

Which of the following is an example of geopolitical risk?

A) A company's poor earnings report

B) A change in government regulations

C) A decrease in consumer demand for a specific product

D) An increase in interest rates

Select an option above to see an explanation here.

A) A company's poor earnings report is an example of unsystematic risk. B) A change in government regulations is an example of geopolitical risk, as it involves political factors that can affect financial markets and investments. C) Low consumer demand for a specific product exemplifies unsystematic risk. D) An increase in interest rates is an example of economic risk, which is related to but distinct from geopolitical risk.

Terms

Geopolitical risk:: The potential impact of political, economic, and social events on financial markets and investments.
Social risk:: The risk associated with changes in societal attitudes, values, or demographics.

Practice Question #2

What type of risk is considered systematic and affects the entire market or a broad segment of the market?

A) Credit risk

B) Liquidity risk

C) Geopolitical risk

D) Unsystematic risk

Select an option above to see an explanation here.

A) Credit risk is specific to individual borrowers and is considered unsystematic. B) Liquidity risk is specific to individual investments and is considered unsystematic. C) Geopolitical risk is considered systematic because it affects the entire market or a broad market segment. D) Unsystematic risk is specific to individual securities or industries and does not affect the entire market or a broad market segment.

Do Not Confuse With

Political risk:: The risk associated with changes in government policies, regulations, or political stability.
Systematic risk:: A risk that affects the entire market or a broad market segment rather than specific securities or industries.
Unsystematic risk:: A risk that affects specific securities or industries rather than the entire market or a broad market segment.

Practice Question #3

Which of the following risks is associated with fluctuations in exchange rates?

A) Currency risk

B) Interest rate risk

C) Political risk

D) Social risk

Select an option above to see an explanation here.

A) Currency risk is associated with fluctuations in exchange rates, which can affect the value of investments in foreign markets. B) Interest rate risk is associated with changes in interest rates, which can affect the value of fixed-income investments. C) Political risk is associated with changes in government policies, regulations, or political stability. D) Social risk is associated with societal attitudes, values, or demographics changes.

Historical Example

In the early 2000s, a series of terrorist attacks and geopolitical tensions led to increased uncertainty in financial markets. This resulted in higher volatility and lower returns for many investments as investors became more cautious and risk-averse.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

Trade disputes between the United States and China have increased tariffs and economic uncertainty in recent years. This has affected financial markets and investments, as investors worry about the potential impact on global economic growth and corporate profits.