Investment Risk

Question 1

Total Risk

AKA

Portfolio Risk

Answer 1

Unsystematic Risk + Systematic Risk

Question 2

Unsystematic Risk

AKA

Non-systematic

Answer 2

Diversifiable risk

Question 3

Systematic Risk

Answer 3

Risk of the overall Market. Non-diversifiable risk.

P - Purchase Power Risk - Ex. Cost of goods go up erode the dollar
R - Reinvestment Rate Risk Ex. Renewing a CD at a lower rate
I - Interest Rate Risk - Ex. Interest rate rise, bonds will fall
M - Market Risk - Ex. Anytime an investor buys securities. Unavoidable.
E - Exchange Rate Risk - Ex. Value of foreign securities go up an down with he value of its currency.

Question 4

Diversify

Answer 4

• Own securities with low positive or zero correlation with the market.
• Own securities of companies in different industries
• A diversified portfolio can have 10-15 securities or some sources say 30 to be diversified.