6 - Risk Flashcards
What are the two types of risk according to MPT
Systematic
Non-systematic - investment specific risk
What is an example of systematic risk
Definition
Banks fail to meet withdrawls
Disruption to financial sytem by economic shock (something out of control)
Which committee board helps with systemic risk
FPC
What is non-systemic risk
Definition
Risk of financial institution defaulting
What are main types of credit risk
5
Default
Downgrade
Credit spread
Counterparty
Bail in
Default risk
Definition
Fail to pay interest and capital on maturity
Downgrade risk
Definition
Risk market anticipates credit agency downgrades bond -> meaning yield has to increase
Credit spread risk
Definition
The difference between yield of different grades of corporate and government bonds
Counterparty risk
What are the main organisations that can also fail
Situation in which organisation which investment is placed or counterparty or transaction fails.
UK banks
Government and corporate bonds
Fund managers and insurance companies
Bail in risk
Definition
Risk banks fail, so they need to be bailed in - See Credit Suisse
Liquidity risk
Risk faced by investors when forced to sell security below value due to lack of liquidity
Event risk
Similiar to default but due to a unexpected event, corporate change, regulatory change
Gearing risk
Leverage risk
When does income become at risk (What term)
short term
Name list of risks
Income risk
Political risk
Regulatory risk
Operational risk
Shortfall risk
Currency risk
Capital risk
Credit risk - default,downgrade,credit spread, counterparty, bail in, liquidity, event, gearing
