Risk, Return, & Investment Performance Flashcards
Define risk in terms of investing?
The degree of uncertainty associated with the return of an asset and the possibility of losing money.
How is the holding period of an investment related to its risk?
The time frame within which the investment will be held has a direct relationship to risk. ie: purchasing power risk & volatility results in a too aggressive or conservative allocation.
Explain how systematic risk can affect a client’s investment?
Systematic risk is found in all securities and is non-diversifiable. PRIME - Purchasing power risk, Reinvestment risk, Interest rate risk, Market risk, Exchange rate risk.
Market Risk?
Stems from factors independent of any particular security and include political events, economic events, social events and investor mood.
Interest Rate Risk?
Asset prices move in opposite direction of interest rates.
Reinvestment Risk?
Risk that rates will have declined when you look to reinvest and not receive the same level of income.
Purchasing Power Risk?
Decrease in purchasing power due to inflation. Dollar in the future is worth less than a dollar in the present.
Exchange Rate Risk?
Who changes the currency assumes the risk.
Define unsystematic risk?
Can be reduced through diversification and it depends on factors unique to a particular asset, firm or security - ie firm specific risk.
What is business risk?
Risk associated with the unique nature of the firm’s operations, management, and position in its industry.
What is financial risk?
Risk associated with the degree to which a company utilizes it debt to finance its operations.
What is default risk?
Risk associated with the condition in which an entity cannot repay its debt obligations.
What is credit risk?
Closely related to default and lower the credit the higher the borrowing costs.
What is liquidity risk?
Risk associated with the ability to transform the investment into cash in a short-period of time with little or no change in price.
What is event risk?
Risk associated with the possibility that a bond or stock holder will be negatively affected by an unanticipated and damaging event.
