Question

Which types of risk can not be avoided by carefully researching a company's business prospects and financial statements.

Answer 1

Risk is the probable chance of loosing value. In most of the cases such risk could be managed through proper risk management technique and/or through fund diversification technique. But, there are two cases where risk can’t be managed or avoided. These are as below:

No.1) systematic risk: this is the market risk, concerning to the whole market. If an investor invests in shares of a business by studying and researching the prospects and the accounting records of that business, it may be considered a good investment; but if the whole market collapses (which is not in the hand of the business or investor), such investment may not be as good. Therefore, researching only on business can’t prevent the systematic risk. This type of risk can’t be diversified as well (means, the loss on one investment could be recovered through the profit on other investments), since the whole market is down.

No.2) inflation risk: this is the risk of rising price level in the market. In case of inflation, money becomes worthless – whatever returns on investment is there, it may not be as good in real term. This is also non-diversified, since the whole market is involved.