Question

What kinds of risk are included in investment risk? Go online to survey current or recent financial news. Find and present a specific example of the impact of each type of investment risk. In each case, how did the type of risk affect investment performance?

Answer 1

Investment Risk

Investment involve some degree of risk. In investment, risk refers to the degree of uncertainty or potential loss inherent in an investment decision. Risk is an important component in assessment of the prospects of an investment. Most investors while making an investment consider less risk as beneficial. The fact is all investments carry a certain amount of risk.

The type of risk may differ from investment to investment. The reason we want to explore the different types of investment risk is to avoid the ultimate risk or loss of capital invested.

1. Market Risk - Market risk is also known as "Systematic Risk", which is associated with market returns. It cannot be eliminated through diversification but can be hedged in other ways. Sources of market risk include recession, natural disaster, inflation, politics, etc.

Example: New report on "Social Media Security Market 2019- 2028" distributed by the MarketResearch.Biz Market.Reports evaluates the market risk which can effect the Social Media Security market. They also provided the solutions with monitoring, threat intelligence and risk management for Small and Medium Enterprises (SMEs) and Large Enterprises.

2. Specific Risk - Specific risk is also known as "Unsystematic Risk", which is not associated directly with market return. It can be nearly eliminated by diversification. It can effect either one stock or small number of stocks for a particular company or industry. Sources of specific risk include a sudden strike by the employees of a company or a new governmental regulation affecting a particular group of companies.

Example: Unrelated price movements can be seen for some stocks of G- Energy S.A. (WSE: CNG) due to which portfolio value of at least 8 stock can be reduced. Some investors use beta as measure of how much a certain stock is impacted by specific risk.

Other types of Investment Risk:

a. Default Risk: When borrower is unable to payback its debts it is considered as Default Risk.

b. Inflation Risk: If your investment returns does not exceed inflation you are losing purchasing power. Higher prices lower the purchasing power of your investment.

c. Economic Risk: Economic recession and depression can have profound effects on asset valuation.

d. Interest Rate Risk: When interest rates rise the price of bonds decline. interest rates also affect economic activity and borrowing costs.

e. Liquidity Risk: Risk that a company or bank may be unable to meet its short term financial demands. This usually occurs due to the inability to convert a security or hard asset to cash without a loss of capital or income in the process.