Chapter 9 - Risk Flashcards
Systematic Risk / Market Risk
Risk that there might be events that lead to a change in expected returns in the stock market. (COVID, Financial Crisis etc)
Non-Systematic Risk / Investment Specific Risk
The risk that there might be a change in expected returns as a result of some event or circumstances specific to a particular company or industry sector
Credit Risk
Credit risk is particularly important for investors in fixed-interest securities (bonds) or cash.
Default risk
Downgrade risk
Credit spread risk
Counterparty risk
Bail-in risk
Default risk
Issuer defaulting on their obligations to pay interest or capital on maturity
Downgrade risk
The risk that the market anticipates that a credit rating agency is going to downgrade a bond. When a bond is downgraded the required return or yield rises to compensate the investor for greater risk.
Credit spread risk
This means bonds issued by corporates will tend to underperform bonds issued by governments. This is a result of a widening of credit spreads; the difference between the yield of different grades of corporate bonds and government bonds.
Counterparty risk
The organisation with which an investment is placed or the counterparty to a transaction fails.
Bail-in risk
Governments and central banks bailed out financial institutions that encountered difficulty, often at great cost to the taxpayer.
Liquidity Risk
Being forced to sell a security at a price below its fair value due to lack of liquidity.
Event Risk
Issuers of a security being unable to pay interest or repay capital of suffering a fall in the value.
Major unexpected event - industrial disaster
Corporate change - Takeover of a business
Regulatory change
Gearing risk
Gearing or leverage is borrowing money with the objective of increasing exposure to other assets, often equities. Gearing will magnify the possible positive and negative returns
Political risk
The risk that a new government or change in government policy will result in revised fiscal and monetary objectives, potential tax changes.
Shortfall risk
The risk that an investor might not achieve their specific financial target when saving or investing money.
