Points to note is Risk is always measured against Returns. Investment has to be planned and measured depending on the Capital available, Time horizon and Appetite.
To make Efficient investment, we need to reduce Risk while maintaining the Potential Returns.
Higher Risk = Higher Potential Returns
Lower Risk = Lower Potential Returns
Major Sources of Investment Risk
Business risk – The risk that the company’s profit margin may be lower than expected due to inefficient management, bad trading policies and changes affecting that industry.
Financial risk – The risk of partial or complete loss of invested capital in the event of the failure of a company or scheme due to an unsound financial structure.
Market risk/Volatility – The risk of capital loss and instability of invested capital, as well as variations in the return from that capital. It is caused by market cycles and movements in the market. It can mean the value of capital can vary, both positively and negatively. These variations can be daily or less frequently. They can vary significantly or not much at all. They can be sudden and unexpected or it can be slow and predicted.
Market timing risk – Economists often use economic cycles (ie. the pattern of the economy), to try and predict when a market will rise or fall. However, this is extremely difficult, as economic cycles are never exactly the same with the same timing.
Economic risk – Risk relating to changes in inflation rates, interest rates, etc.
Political risk – Changes in Government and Government policies.
Interest rate risk/Re-investment risk – Some investors attempt to avoid volatility by investing in fixed rate investments. They then face the risk that when the investment matures the money may Oavsett leverantor kan du alltid spela en mangd videoslots och spelautomater online (inklusive nagon eller nagra jackpottslots) samt Blackjack och roulette. have to be reinvested and interest rates could be significantly lower. Thus, if they are relying on the interest as income this income could dramatically decrease.
Credit risk – When money is placed with banks and companies through term deposits and debentures they use it in their businesses and pay an interest rate for doing so. The risk here is the financial ability of those institutions to be able to pay the interest and/or repay the capital on the due date.
Mismatch risk – This means that although a chosen investment may be considered a good investment for certain investors, it may be a poor one if it does not suit the needs and circumstances of the investor.
Inflation risk - Whether inflation is high or low, the cost of goods has always increased over time. If the chosen investment does not at least grow at the same rate then the real purchasing power of the money is being eroded.
Liquidity risk – Considerable problems can occur if money is required for unforeseen expenses and the investments cannot be turned into cash quickly or without costs.
Legislative risk – Long-term investment strategies can be selected based on current tax laws and regulations. If these should be changed later then the results required could be badly affected.
Risk of not diversifying – Diversifying investments means spreading the capital across various areas. Generally speaking these areas are the actual assets, or markets, in which the capital is invested. If your investment capital is reliant on one asset, or one class of asset, you are exposed to the risk of not diversifying. By spreading your investment capital amongst various assets and asset classes, should one area do badly, not all the capital is affected.