Which term describes risk associated with political changes that may negatively impact domestic and foreign firms?

• A. Political Freedom
• B. Political Risk
• C. Systematic Risk
• D. Interdependence

Answer: (B)

Political risk describes the risk that political changes could negatively affect both domestic and foreign firms. This includes shifts in government policy, regulatory changes, or political instability that alter taxes, tariffs, licensing, or the overall business climate, potentially harming profits or operations. Because these risks stem from the political environment, they can impact companies operating within a country and those connected to it through trade and investment.

Political freedom concerns civil liberties rather than business risk. Systematic risk refers to market-wide factors that affect many assets regardless of political events, not specifically tied to political changes. Interdependence describes mutual reliance between economies or firms, not a risk category. So political risk is the best fit for this description.