Chapter 1 - Nature And Source Of Risk Flashcards
How is risk defined from the general sense
Potential for loss of something of value
How is risk defined from the return on Investment standpoint
The potential that an expected outcome will not materialize
How do you define risk from an investor’s standpoint
The amount of uncertainty an investor is willing to accept with regards to the future returns they expect on an investment
What is risk tolerance
The level of risk that an investor is willing to take on an investment
How is risk measured
With standard deviation
What are the two main sources of risk
Financial and non-financial risk
What is financial risk
All risk derived from the events in the external market
What is non financial risk
All other forms of risk
List the financial risks
Market risk, credit risk and liquidity risk
Give the main features and characteristics of market risk
- Results from change in supply and demand in a market
- Largest component of risk
- Measured in terms of changes in market value
- Tied to changes in interest rate, exchange rates, commodity prices and equity prices
What is credit loss
- Loss caused by a counter party
2. Debtors failure to make a promised payment
What are credit derivatives used for
To hedge against credit risk
What is liquidity risk
Probability of incurring loss when an asset or security cannot be liquidated fast enough and at fair prices
Why is it difficult to measure liquidity
Liquidity seems to be adequate until a crisis event occurs
What is a good indicator of liquidity for traded securities
Narrow bud-ask spread
List all the non financial risks
- Operational risk
- Settlement risk
- Model risk
- Sovereign
- Political risk
- Regulatory risk
- Cyber risk
- ICT risk
What is operational risk
Loss attributed to the failure of a company’s systems or procedures or external events outside the control of the organization
What is settlement risk
The probability that one party will not uphold their contractual obligation
What is model risk
Occurs when a financial model used to measure quantitative information, performs poorly or fails leading to an adverse outcome for the organization
What is sovereign risk
Risk in meeting the obligations by a country. This is the broadest measure of credit risk
What is political risk
Risk that an investment’s returns can be affected by political changes or instability in the market
Cyber risk
Potential exposure to risk and harm stemming from a firm’s information or communication systems
What is ICT risk
Business risk associated with the use, operations, ownership, influence, adoption, adoption and involvement of ICT within an organization
