Unit 19: Types of Investment Risks Flashcards
Systemic risk
-associated with macroeconomic factors
-cannot be diversified away
Types of systemic risk- PRIME
Purchasing power
Reinvestment
Interest rate
Market
Exchange rate
Market Risk
When the stock market tanks, many stocks can be affected due to correlation
Beta
Measures the amount of market risk a security has
Interest Rate Risk
As rates rise, bond prices will fall.
-spreading out duration will not hedge against this
Reinvestment risk
if similar coupon is not available upon time to reinvest
-zero coupon avoids issue
Inflation risk
Reduced purchasing power caused by rising inflation.
-TIPS an investment to hedge
Exchange Rate/Currency Risk
if purchasing foreign securities, exposed to risk of domestic or foreign currency moving.
non-systematic risks
Risks that can be reduced through diversification, usually sector or business specific.
Examples: Business risk, Financial risk, Regulatory risk, Legislative risk, Political risk, Sovereign risk, Country risk, Liquidity risk.
Business risk
possibility of loss due to poor management decisions.
Financial risk
if a company gets too leveraged. AKA credit risk, default risk
Regulatory risk
if regulations are changed enough to disrupt a business’s profitability
Legislative risk
if laws are changed enough to disrupt business profitability
Political risk
Related to regulatory and legislative risk, but more focused on potential for political overthrowing. emerging markets most at risk for this.
Sovereign risk
risk of a country defaulting on its commercial debt obligations.
Country risk
measuring overall risk of a country including all regulatory, legislative, and political risks
