Chapter 20- investment risks Flashcards
systematic risks (4)
- market risk
- interest rate risk
- inflation risk
- event risk
unsystematic risks (4)
- business risk
- regulatory risk
-political risk - liquidity risk
Investment outperforms a rising market and
underperforms a falling market
high beta
Investment underperforms a rising market and outperforms a falling market
low beta
Bond prices are increasing
falling IR
Purchasing power is diminished
rising IR
Factors in the rate of inflation when determining return
real interest rate
BUSINESS RISK
Risk that a company may perform poorly causing a decline in the value of the stock
REGULATORY RISK
Risk that new regulations may have a negative impact on an investment’s value
POLITICAL RISK
Risk that political event outside of the U.S. could adversely affect the domestic markets
LIQUIDITY RISK
Stemming from a lack of marketability, this is risk that an investment cannot be bought
or sold quickly enough to prevent or minimize a loss
LEGISLATIVE RISK
Risk that new laws may
have a negative impact
on an investment’s
value (e.g., tax code
changes)
Assumes that markets are efficient and creating an optimal portfolio requires allocating assets based on a client’s risk
tolerance and investment objectives
- buy and hole
- indexing
- systematic rebalancing
passive (strategic) asset allocation
Assumes that markets are inefficient; Involves altering the asset mix in anticipation of changing economic conditions/events (market timing)
- sector rotation
tactical (active) asset allocation
If an investor anticipates an increase, in the underlying asset’s value, but fears a decrease, he should:
buy a put
