Sector risk refers to the potential for losses within a specific industry or sector due to factors that affect the entire sector. This type of risk is a subset of systematic risk, which impacts the entire market or economy. Understanding sector risk helps investors make informed decisions about diversifying their portfolios and managing risk.
Which of the following best describes sector risk?
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Correct!
Select an option above to see an explanation here.
A) This describes systematic risk. B) This describes unsystematic risk. C) This is the correct definition of sector risk. D) This describes inflation risk.
Which of the following is an example of a defensive sector?
A) Automobiles are a cyclical sector. B) Housing is a cyclical sector. C) Utilities are a defensive sector, as they are less sensitive to economic cycles. D) Technology can be considered a cyclical sector.
How can an investor reduce the impact of sector risk on their portfolio?
A) This would likely increase the impact of sector risk. B) This would not necessarily reduce the impact of sector risk. C) Diversification across various sectors can help reduce the impact of sector risk. D) Investing only in individual stocks would not necessarily reduce the impact of sector risk.
In the early 2000s, the technology sector experienced a significant downturn, known as the dot-com bubble burst. This sector risk event led to widespread losses for investors who had heavily invested in technology stocks, as many companies in the sector saw their stock prices plummet.
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Example Series 65 Example Practice Question
Investors concerned about potential sector risk in the energy industry might diversify their portfolio by investing in stocks from other sectors, such as healthcare or consumer goods. This can help reduce the impact of any adverse events within the energy sector on their overall investment performance.