Risks Flashcards
Market risk*
Negatively correlated securities in portfolio
Hedging (options positions)
cannot diversify out of systematic risks
Interest rate risk*
Intrinsic to fixed income investments (bond securities, preferred stock)
Also at risk: public utility company
Highly leveraged Co
Liberal div pol, so price largely determined by dividend yield
Reduce through laddering a bond or CD portfolio
Reinvestment risk*
Avoid with zero coupon bonds
(Possibly long term)
Inflation risk aka purchasing power risk*
Fixed income securities most vulnerable
Equities least susceptible
Tangible assets (R/E, gold) can be a hedge
Nonsystematic risk
Unique to specific business, specific industry
Reduced through diversification
Business risk
Poor management decisions
Higher risk if portfolio heavy on stock of only one issuer or lower rated bonds
Financial risk
AKA credit risk
AKA default risk
Over-leveraging => potential BK
Regulatory risk
Changes in regulations affects bx
Ex: oil & gas industry vs EPA, pharma, green industries
Legislative risk
Change in laws
Ex: Change in tax code make an investment less attractive
Luxury tax on yachts vs. Boat building industry
Political risk
Instability in politics of a country (ex coup)
Venezuela
Sovereign risk
Risk of a country defaulting on its commercial debt
Liquidity risk
(Similar to Marketability risk)
You want to sell but nobody is willing to buy
Or
Large purchase or sale not possible at current price
Ex. Real estate (months) vs. Treasuries (seconds)
Highly liquid:
Listed stocks
Mutual funds
Less liquid:
Thinly traded stocks
Many Municipal bonds
Tangible assets
Currency risk, exchange rate risk
Value of either foreign or domestic currency may fluctuate, impacting the exchange transaction
Purchaser of foreign securities or ADRs, vacationers
Risk disclosures
Penny stocks- firm must receive signed & dated ack of receipt.
SEC requires firm wait 2bd after sending disclosure before execution of trade.
Investment co disbursement-
(Mutual fund, ETF)
Written statement accompanies dividend pmts. Says where pmts per share are made from (usually NII)
DPP roll ups- disclose:
-Risks
-GP belief of fairness
-Reports, opinions, appraisals
control relationships
reg FD (full disclosure)- unintentional leak of material non-public info? Issuer must disclose before next trading day
tender offers must be open at least 20 bz days from announcement.
If changes, another 10 bz days required.
Target company (hostile takeover) must send statement to SH with accept, reject, no opinion within 10 bz days of announcement
prohibited? Short-tendering
must be NET long the stock
Partial tender exception-
if offer is for <100% of outstanding OR is contingent on a number of shares being offered, holders of convertibles can tender without converting. Only convert if offer is accepted
Options Disclosure Document p.58 provide to any prospective Options customer.
Risk disclosure document (for Margin accounts) p.60
HIGHLY TESTED
acceptance of soft dollars and how it can create conflict of interest
P. 386
Possible elder abuse-
aka Specified adult
how long can the firm place a temp hold on disbursement of funds?
15 days hold on disbursements
Eff 2023, can also place a temporary hold on securities transactions, effectively freezing the account
After freezing the acc, MUST contact all authorized parties to the account
AND the trusted contact person
