There should be “Legislative Risk” and “Political Risk” added to the list here in the non-systematic category to make things clearer. They are not part of Regulatory Risk.
I made that assumption and got it wrong on a Kaplan’s QBank.
I looked up the search engine here on this site to read the notes and found out that it wasn’t part of the non-systematic risk list.
For example, Tax codes and luxury tax are legislative/political risk whereas environmental regulation are regulatory.
You spoke about Legislative Risk and Political Risk in a different chapter and it seems like a different topic altogether.
If it makes you feel any better I also got our Achievable question on regulatory vs legislative risk wrong.
I believe the general difference is that:
- Legislative risk is about laws, e.g. imported coffee now has a 20% tariff
- Regulatory risk is about processes, e.g. coffee importers now need a government-certified permit that must be renewed each year
Legislative, regulatory, and political are all definitely non-systematic risks.
@brandonrith can you confirm that or add any more info?
Thanks! it would be helpful if you can add “legislative and political risks” to the non-systematic chapter’s list.
Hi @FoxMcCloud - good points you bring up here. First, let’s discuss the three risks that sound so familiar:
Legislative risk - risk of a new law passed by Congress and signed by the President negatively affecting an investment
Regulatory risk - risk of a new regulation (typically created and installed by a federal agency like the EPA or FDA) negatively affecting an investment
Political risk - risk of government instability (military coup, war, etc.) negatively affecting an investment
These three risks are all similar, but are unique in their own way. Additionally, legislative and regulatory risk are almost always domestic, while political risk is almost always foreign.
These risks aren’t discussed until the debt securities chapter as I expect most test questions to focus on how these risks apply to debt securities. However, it’s definitely possible to encounter a test question relating these risks to common stocks. I’ll make some updates to the material today to include these risks earlier in the material. Thanks!