CFA Level I · CFA Level I Exam · Introduction to Geopolitics
An analyst separates geopolitical risks into those that can be anticipated and those that cannot. Which of the following is the best example of a geopolitical risk that is unpredictable in timing and unlikely but severe?
A sudden outbreak of war between neighboring states is the best example. It is a tail risk with unpredictable timing and severe consequences. Scheduled elections and pre-announced tariffs are known in advance, so they are predictable and can be incorporated into forecasts.
- AA scheduled national election
- BA sudden outbreak of war between two neighboring statesCorrect
- CA pre-announced tariff increase taking effect next quarter
Explanation
A sudden outbreak of war is a low-probability, high-impact tail event with unpredictable timing. Scheduled elections and pre-announced tariffs have known dates, so investors can plan for them and they are predictable events rather than unexpected tail risks.
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