Risk Flashcards
Systematic Risk
This effects the market as a whole and cannot be avoided. It is the risk that markets will generally go up and down as a result of news or events, such as:
A change in interest rates or inflation
Tax Changes made by the government
Terrorist attacks or wars
Non Systematic Risk
This is a risk that is unique to a particular company and relates to unexpected pieces of good or bad news. It can be eliminated by holding a diverse range of funds.
Examples are:
New competitor enters the market
Technological breakthrough changes the market
Change in a company credit rating
Interest Rate Risk
This typically effects cash holdings. It is the risk that the return earned on cash deposits will vary depending on movements in interest rates.
Key Factors of Interest Rate Changes:
The Economic Cycle
Government Fiscal Policy - Spending
Government Monetary Policy - Interest Rates
Inflation - If inflation is expected to increase, this will push up longer term interest rates, typically leading to a steeper yield curve
Inflation Risk
Cash or fixed interests do not keep up with the pace of inflation and lose value in real terms
Currency Risk
Where an investment is made overseas by a sterling investor, there is a risk that sterling may appreciate or depreciate against overseas currency.
It can also impact individual stock, e.g. a company which generates turnover from overseas and converts back to sterling
Shortfall Risk
This is the risk that an investor may not achieve their financial target when saving or investing.
Regulatory Risk
The risk that current regulations could change i.e. qualifying investments, EIS reliefs etc.
Political Risk
International political developments can have major shockwaves in the stock market. Wars or fear of conflict is a major example. Or trade wars such as China vs USA
Credit Risk
Very important for investors in bonds or deposits.
Default Risk - issuer defaults on obligation to to pay interest and capital on maturity
Downgrade Risk - anticipation that a credit rating agency is going to downgrade a bond. When a bond is downgraded, the required yield rises for the extra risk, this means that the price of the bond will fall.
Credit Spread Risk - When investors get nervous they head for quality meaning corporate bonds can under perform against government bonds.
Sequencing Risk
Sequencing risk is a problem that affects the value of an investment depending from the order (or sequence) the returns are generated. Particular problem in retirement in the de accumulation phase as risk of fund exhaustion.
Counterparty Risk
This is the risk that the organisation with which an investment is placed, or the counter party to a transaction, will fail. Examples include Norther Rock and Co op Bank
