Types Of Investment Risk Flashcards
What is total risk?
It is measured by standard deviation
It is systematic, or non-diversifiable, risk, combined with unsystematic, or diversifiable, risk
As more as more securities are added to a portfolio, the level of unsystematic risk decreases
What are the systematic risks?
“Remember the word PRIME”
Purchasing power risk
Reinvestment rate risk
Interest rate risk
Market risk
Exchange rate risk
What is unsystematic risks?
Business risk
Financial risk
Default risk
Political risk
Investment manager risk
Liquidity and marketability risk
Tax risk
What is systematic risk, also known as market and non-diversifiable risk?
Risk inherit in the investment market
Cannot be eliminated through diversification, it is non-diversifiable
What is purchasing power risk?
It is inflation risk
Fixed income assets are subject to inflationary pressure, inflation is greater than the fixed rate you were earning eroding purchasing power
What is reinvestment rate risk?
Proceeds available for reinvestment must be reinvested at a lower rate of return
Investments with Long terms to maturity and high interim cash flows have the greatest investment rate risk
Are zero-coupon bonds in non-dividend paying stocks, subject to reinvestment rate risk?
No, because cash flows are only received at sale or maturity
What is interest rate risk?
Changes in interest rates will affect the value of a security
Interest rates rise value of bonds declines
Rising interest rates generally have a negative effect on stocks
What is market risk?
Price volatility in the overall securities marketplace, affected by changes in the general economy
What is exchange rate for currency risk?
Risk that a change in the relationship between the value of the dollar and the value of the foreign currency during the period of investment will negatively affect the investors return
What is unsystematic risk, also known as nonmarket or diversifiable risk?
Risk that is unique to a single security, business, industry, or country
Can be significantly reduced with portfolios containing as few as 10 stocks
What is business risk?
Uncertainty of operating income
What is financial risk?
Firms financial structure will negatively affect value of an equity investment
What is default risk?
Risk that a borrower will be unable to service its debt obligations
Does default risk apply to Stocks?
No
