chapter 6 Flashcards
1
Q
systematic risk
A
- the risk of disruption to the entire system ie a failure. The bank of england’s financial policy committee tries to identify this risk.
- modern portfolio theory uses this definition and carecterisation
2
Q
non systematic risk
A
- this is the risk of a single financial institution defaulting. this is the risk that the organisation with an investment is placed or a counter party will default.
3
Q
default risk - capital
A
-this is risk defaulting on meeting obligations. They need to pay interest and capital on maturity.
- if the credit rating decides that this risk is higher the value of the bonds will fall.
4
Q
downgrade risk - capital
A
- the risk that people anticioate credit agencies downgrading. when a bind is downgraded the required return of the yield rises to compensate the investor for the greater risk, this means that the price of the bond will fall.
5
Q
credit spread risk - capital
A
- there is a flight to quality.
- bonds issued by corporates will tend to underperform bonds issued by governments. This is a result if widening if credit spreads. The difference between the yield is different grades of corporate bonds and government.
6
Q
counterparty risk
A
- risk refers to a situation which the organisation with which an investment is placed or the counterparty to a transaction fails.
-uk deposit takes , governments and fund managers.
- fund managers have legislation which reduces the risk. ie SIPP
7
Q
Bail In Risk
A
- This is increasingly important.
- after the bailouts regulators developed strategies such as first line of financial assistance comes from the banks own exsisting capital. The institutions shareholders, bond holders and uninsured depositors are used - in that order. With bail in those with money in the bank may see their money reduce
8
Q
liquidity risk
A
- the risk that it won’t sell for a fair price because of the need for liquidity
- private equity can be illiquid
- corporate bonds and small cap shares also can be illiquid
9
Q
Event risk
A
- this is similar to default risk
- this is issuer of a security being unable to pay interest or repay capital or suffering a fall in value of their securities due to - major unexpected event, corporate change or regulatory change. Covid is the example
10
Q
gearing risk
A
- gearing or leverage borrowing is borrowing money to increase the gains by increasing access to equities. I’d you make a loss though you end up loosing more and paying interest. Tempting for clients wanting high returns, must be balanced against the higher level of risk or volatility of returns.
- can use futures and options to do this
11
Q
cash deposit - income risk
A
- variations in short term they’re mean fluctuating returns. Unlike Bonds they do not benefit from increasing capital value
12
Q
bond income - income risk
A
- bonds protect people from caring income by paying a set income. Unless they are index linked they will call in real terms with inflation.
- if it’s fixed it won’t be competitive if rates rise.
- index link ones will cost a lower income yield. Low coupons mean that capital value is more volatile
- floating rate bonds will be issued by companies with a lower credit rating
13
Q
dividend income - income risk
A
- dividends from shares fluctuate
- if the company makes a profit then they may not allocate all the profit. Capital profit additional expenses willingness to make a payment.
- some companies have a tradition of not paying dividends
14
Q
property income
A
commercial properties had increase only clauses.
- tenants may not be able to pay
- during covid many landlords had to reduce rent in order to allow tenants to keep trading
15
Q
interest rate risk
A
- if interest rates go up fixed interest securities reduce their capital value.
16
Q
interest rate risk bonds
A
- bonds with shorter maturity dates or higher coupons will have shorter durations. Bonds with shorter durations are less sensitive to changing estates and thus are less volatile in a changing rate market.
17
Q
regulatory risk
A
- being misled
- insufficient market mechanisms ie confirming ownership securities
- market manipulation
18
Q
inflation protection
A
- beating inflation usually is by accepting capital risk by investing in assets such as shares and property
- index linked government securities also give oroetecrjon against inflation in the longer term but in shorter their value is driven by market sentiment and their inflation proofing is only guaranteed if the stock is bought at issue and held to redemption
- inflation should follow real asset investment
19
Q
currency risk
A
- if an investment is made overseas by. sterling based investor there is the risk that sterling may appreciate it depreciate against the overseas currency.
- currency risk can affect investment in individual securities. Companies depending on exporting products and currency where goods are manufactured appreciates then the profitability will be affected.
20
Q
political risk
A
- change in new government will result in revised fisical and monetary objectives.
21
Q
shortfall risk
A
-This is the risk that the investor doesn’t achieve the specific financial target.
- for retirement the FCA had introduced investment pathways. many non advised drawdown clients favoured cash.
22
Q
long term and volatility
A
- investing long term flexible investment periods mean short term fluctuations are less dangerous
- not selling at port time
- lind cost averaging ie buying units regularly so you get them low as well as high
- reverse pound cost averaging so you sell when you only have to sell a few units not a lot. This helps to reduce the risk and stop devaluation
23
Q
diversification
A
- diversification across sectors will reduce non systemic risk
- equity investments can spread across different investments
- increases possibility of stable returns through all economic cycles
- it minimises tim of the overall portfolio suffering a significant drawdowns
- it spread the opportunity for potential rerun across asset classes.
