Matching Financial Concepts: Step-by-Step Solution

This question requires matching specific financial terms from List I with their correct meanings in List II. We will analyze each item from List I.

Analyzing List I Concepts

• A. Systematic risk: This refers to market-wide risk that cannot be diversified away. An increase in corporate tax rate (II) affects the overall market or economy, making it a factor contributing to systematic risk.
• B. Beta: Beta measures the volatility of an asset relative to the overall market. It quantifies how much an asset's price is expected to move relative to market movements, essentially acting as a sensitivity coefficient (III).
• C. Risk-free rate: This is the theoretical return on an investment with zero risk. It essentially represents the compensation for time (I) invested, reflecting the time value of money.
• D. Unsystematic risk: Also known as specific risk, this is risk unique to a particular company or industry. An event like a competitor enters the market (IV) directly impacts specific firms, representing unsystematic risk.

Correct Matching

Based on the analysis, the correct matches are:

• Systematic risk (A) matches with Increase in corporate tax rate (II).
• Beta (B) matches with Sensitivity coefficient (III).
• Risk-free rate (C) matches with Compensation for time (I).
• Unsystematic risk (D) matches with Competitor enters the market (IV).

Therefore, the correct option is the one that represents the pairing A-II, B-III, C-I, D-IV.